What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Globus Maritime (NASDAQ:GLBS) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Globus Maritime:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.035 = US$5.7m ÷ (US$174m – US$9.6m) (Based on the trailing twelve months to September 2021).
Thus, Globus Maritime has an ROCE of 3.5%. In absolute terms, that’s a low return and it also under-performs the Shipping industry average of 10%.
Above you can see how the current ROCE for Globus Maritime compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
The fact that Globus Maritime is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it’s earning 3.5% which is a sight for sore eyes. Not only that, but the company is utilizing 205% 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.
One more thing to note, Globus Maritime has decreased current liabilities to 5.5% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line
In summary, it’s great to see that Globus Maritime has managed to break into profitability and is continuing to reinvest in its business. Although the company may be facing some issues elsewhere since the stock has plunged 100% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 4 warning signs for Globus Maritime (of which 2 don’t sit too well with us!) that you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.