If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Scorpio Tankers (NYSE:STNG) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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 Scorpio Tankers, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$833m ÷ (US$4.3b - US$706m) (Based on the trailing twelve months to September 2023).
So, Scorpio Tankers has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 16%.
View our latest analysis for Scorpio Tankers
Above you can see how the current ROCE for Scorpio Tankers compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Scorpio Tankers here for free.
What Can We Tell From Scorpio Tankers' ROCE Trend?
We're delighted to see that Scorpio Tankers is reaping rewards from its investments and has now broken into profitability. The company now earns 23% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Scorpio Tankers has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line
To bring it all together, Scorpio Tankers has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
Scorpio Tankers does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...
Scorpio Tankers is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.