We Like These Underlying Trends At Diamond S Shipping (NYSE:DSSI)

Simply Wall St
·3 min read

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Diamond S Shipping's (NYSE:DSSI) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Diamond S Shipping, this is the formula:

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

0.081 = US$152m ÷ (US$2.1b - US$174m) (Based on the trailing twelve months to September 2020).

So, Diamond S Shipping has an ROCE of 8.1%. On its own, that's a low figure but it's around the 9.0% average generated by the Oil and Gas industry.

See our latest analysis for Diamond S Shipping

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Above you can see how the current ROCE for Diamond S Shipping compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Diamond S Shipping has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 8.1% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

In summary, we're delighted to see that Diamond S Shipping has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 48% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Diamond S Shipping does have some risks though, and we've spotted 1 warning sign for Diamond S Shipping that you might be interested in.

While Diamond S Shipping 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.

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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