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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating EuroDry (NASDAQ:EDRY), we don't think it's current trends fit the mold of a multi-bagger.

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 EuroDry:

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

0.025 = US$5.0m ÷ (US$220m - US$19m) (Based on the trailing twelve months to June 2024).

Thus, EuroDry has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 9.2%.

Check out our latest analysis for EuroDry

In the above chart we have measured EuroDry's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering EuroDry for free.

What Can We Tell From EuroDry's ROCE Trend?

In terms of EuroDry's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.1%, but since then they've fallen to 2.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On EuroDry's ROCE

To conclude, we've found that EuroDry is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 165% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for EuroDry (of which 1 is concerning!) that you should know about.

While EuroDry 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. 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.