Returns At Performance Shipping (NASDAQ:PSHG) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Performance Shipping (NASDAQ:PSHG) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.11 = US$30m ÷ (US$293m - US$26m) (Based on the trailing twelve months to December 2022).

So, Performance Shipping has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Shipping industry average it falls behind.

View our latest analysis for Performance Shipping

Historical performance is a great place to start when researching a stock so above you can see the gauge for Performance Shipping's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Performance Shipping, check out these free graphs here.

The Trend Of ROCE

Performance Shipping has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 11% on its capital. Not only that, but the company is utilizing 104% more capital than before, but that's to be expected from a company 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 8.9%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Performance Shipping's ROCE

In summary, it's great to see that Performance Shipping has managed to break into profitability and is continuing to reinvest in its business. And since the stock has dived 100% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know about the risks facing Performance Shipping, we've discovered 5 warning signs that you should be aware of.

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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