Yahoo Finance Top Ships (NASDAQ:TOPS) Is Looking To Continue Growing Its Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Top Ships' (NASDAQ:TOPS) 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. To calculate this metric for Top Ships, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = US$26m ÷ (US$475m - US$35m) (Based on the trailing twelve months to June 2022).
Therefore, Top Ships has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 16%.
Check out our latest analysis for Top Ships
Above you can see how the current ROCE for Top Ships 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 Top Ships here for free.
How Are Returns Trending?
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 5.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 162%. So we're very much inspired by what we're seeing at Top Ships thanks to its ability to profitably reinvest capital.
The Bottom Line
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 Top Ships has. However the stock is down a substantial 100% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
If you'd like to know more about Top Ships, we've spotted 4 warning signs, and 2 of them are potentially serious.
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.
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