What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Ardmore Shipping (NYSE:ASC) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ardmore Shipping is:

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

0.19 = US$123m ÷ (US$704m - US$74m) (Based on the trailing twelve months to March 2024).

Thus, Ardmore Shipping has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Oil and Gas industry.

In the above chart we have measured Ardmore Shipping's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ardmore Shipping .

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

Ardmore Shipping has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 19% on its capital, because five years ago it was incurring losses. 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Key Takeaway

To sum it up, Ardmore Shipping is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Ardmore Shipping can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Ardmore Shipping, we've spotted 2 warning signs, and 1 of them is significant.

While Ardmore Shipping isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.