We Like These Underlying Return On Capital Trends At Top Ships (NASDAQ:TOPS)
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Top Ships (NASDAQ:TOPS) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Top Ships, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$33m ÷ (US$469m - US$32m) (Based on the trailing twelve months to December 2022).
Therefore, Top Ships has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 23%.
Check out our latest analysis for Top Ships
In the above chart we have measured Top Ships' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Top Ships.
What Does the ROCE Trend For Top Ships Tell Us?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 124% more capital is being employed now too. So we're very much inspired by what we're seeing at Top Ships thanks to its ability to profitably reinvest capital.
The Bottom Line
In summary, it's great to see that Top Ships can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. However the stock is down a substantial 100% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Top Ships (of which 1 shouldn't be ignored!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
