To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Pacific Basin Shipping's (HKG:2343) returns on capital, so let's have a look.
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. The formula for this calculation on Pacific Basin Shipping is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.42 = US$1.0b ÷ (US$2.9b - US$417m) (Based on the trailing twelve months to June 2022).
So, Pacific Basin Shipping has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Shipping industry average of 15%.
View our latest analysis for Pacific Basin Shipping
SEHK:2343 Return on Capital Employed September 18th 2022Above you can see how the current ROCE for Pacific Basin Shipping compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pacific Basin Shipping.
The Trend Of ROCE
We're delighted to see that Pacific Basin Shipping is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 42% on its capital. Not only that, but the company is utilizing 29% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
In summary, it's great to see that Pacific Basin Shipping has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 114% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Pacific Basin Shipping can keep these trends up, it could have a bright future ahead.
On a final note, we found 4 warning signs for Pacific Basin Shipping (1 is a bit unpleasant) you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.