Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Tsakos Energy Navigation (NYSE:TNP) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Tsakos Energy Navigation:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$387m ÷ (US$3.4b - US$417m) (Based on the trailing twelve months to June 2023).
Thus, Tsakos Energy Navigation has an ROCE of 13%. In isolation, that's a pretty standard return but against the Oil and Gas industry average of 19%, it's not as good.
See our latest analysis for Tsakos Energy Navigation
In the above chart we have measured Tsakos Energy Navigation's 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 Tsakos Energy Navigation.
What Can We Tell From Tsakos Energy Navigation's ROCE Trend?
Tsakos Energy Navigation 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 934% 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Our Take On Tsakos Energy Navigation's ROCE
In summary, we're delighted to see that Tsakos Energy Navigation has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 48% return over the last five years. In light of that, we think it's worth looking further into this stock because if Tsakos Energy Navigation can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 4 warning signs facing Tsakos Energy Navigation that you might find interesting.
While Tsakos Energy Navigation isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.