There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we’ve noticed some promising trends at Steamships Trading (ASX:SST) so let’s look a bit deeper.
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Steamships Trading is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.093 = K108m ÷ (K1.5b – K359m) (Based on the trailing twelve months to December 2022).
So, Steamships Trading has an ROCE of 9.3%. On its own that’s a low return, but compared to the average of 7.4% generated by the Industrials industry, it’s much better.
See our latest analysis for Steamships Trading
Historical performance is a great place to start when researching a stock so above you can see the gauge for Steamships Trading’s ROCE against it’s prior returns. If you’re interested in investigating Steamships Trading’s past further, check out this free graph of past earnings, revenue and cash flow.
Steamships Trading is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 81% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.
To bring it all together, Steamships Trading has done well to increase the returns it’s generating from its capital employed. And since the stock has fallen 36% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to know some of the risks facing Steamships Trading we’ve found 4 warning signs (1 doesn’t sit too well with us!) that you should be aware of before investing here.