What Does Star Bulk Carriers Corp.’s (NASDAQ:SBLK) 5.4% ROCE Say About The Business?
Today we'll evaluate Star Bulk Carriers Corp. (NASDAQ:SBLK) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Star Bulk Carriers:
0.054 = US$150m ÷ (US$3.0b - US$223m) (Based on the trailing twelve months to December 2018.)
Therefore, Star Bulk Carriers has an ROCE of 5.4%.
Check out our latest analysis for Star Bulk Carriers
Is Star Bulk Carriers's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Star Bulk Carriers's ROCE is fairly close to the Shipping industry average of 4.9%. Regardless of how Star Bulk Carriers stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Star Bulk Carriers delivered an ROCE of 5.4%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Star Bulk Carriers's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Star Bulk Carriers has total assets of US$3.0b and current liabilities of US$223m. Therefore its current liabilities are equivalent to approximately 7.4% of its total assets. Star Bulk Carriers has very few current liabilities, which have a minimal effect on its already low ROCE.
The Bottom Line On Star Bulk Carriers's ROCE
Still, investors could probably find more attractive prospects with better performance out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
