What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Performance Shipping (NASDAQ:PSHG) 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. The formula for this calculation on Performance Shipping is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = US$44m ÷ (US$310m - US$12m) (Based on the trailing twelve months to June 2024).

So, Performance Shipping has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Shipping industry average of 9.2% it's much better.

View our latest analysis for Performance Shipping

Above you can see how the current ROCE for Performance Shipping compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Performance Shipping .

What Can We Tell From Performance Shipping's ROCE Trend?

The fact that Performance Shipping 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 15% which is a sight for sore eyes. In addition to that, Performance Shipping is employing 171% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Performance Shipping's ROCE

Overall, Performance Shipping gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Although the company may be facing some issues elsewhere since the stock has plunged 99% 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.