To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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, Safe Bulkers (NYSE:SB) looks quite promising in regards to its trends of return on capital.
Understanding 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 Safe Bulkers, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.082 = US$106m ÷ (US$1.4b – US$58m) (Based on the trailing twelve months to March 2024).
Therefore, Safe Bulkers has a ROCE of 8.2%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 8.2%.
See our latest analysis for Safe Bulkers
In the above chart we have measured Safe Bulkers’ 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 analyst report for Safe Bulkers .
What Can We Tell From Safe Bulkers’ ROCE Trend?
Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 29% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what Safe Bulkers has. Since the stock has returned a staggering 336% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing to note, we’ve identified 3 warning signs with Safe Bulkers and understanding these should be part of your investment process.
While Safe Bulkers may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
