If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at GasLog (NYSE:GLOG), it didn’t seem to tick all of these boxes.
What is 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 GasLog:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.055 = US$281m ÷ (US$5.5b – US$426m) (Based on the trailing twelve months to September 2020).
Therefore, GasLog has an ROCE of 5.5%. Ultimately, that’s a low return and it under-performs the Oil and Gas industry average of 9.0%.
View our latest analysis for GasLog
In the above chart we have measured GasLog’s 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 report for GasLog.
What The Trend Of ROCE Can Tell Us
In terms of GasLog’s historical ROCE trend, it doesn’t exactly demand attention. The company has consistently earned 5.5% for the last five years, and the capital employed within the business has risen 52% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don’t provide a high return on capital.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 7.7% of total assets, is good to see from a business owner’s perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line
In conclusion, GasLog has been investing more capital into the business, but returns on that capital haven’t increased. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.
One more thing, we’ve spotted 4 warning signs facing GasLog that you might find interesting.
While GasLog 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. 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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