Slowing Rates Of Return At Golden Ocean Group (NASDAQ:GOGL) Leave Little Room For Excitement
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Golden Ocean Group (NASDAQ:GOGL), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Golden Ocean Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = US$178m ÷ (US$3.5b - US$261m) (Based on the trailing twelve months to September 2023).
So, Golden Ocean Group has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 8.9%.
View our latest analysis for Golden Ocean Group
In the above chart we have measured Golden Ocean Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Golden Ocean Group here for free.
What Can We Tell From Golden Ocean Group's ROCE Trend?
There are better returns on capital out there than what we're seeing at Golden Ocean Group. Over the past five years, ROCE has remained relatively flat at around 5.4% and the business has deployed 23% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
In summary, Golden Ocean Group has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 232% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Golden Ocean Group does have some risks though, and we've spotted 3 warning signs for Golden Ocean Group that you might be interested in.
While Golden Ocean Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
