On Friday, both Sturm Ruger (NYSE:RGR) and Nordic American Tankers (NYSE:NAT) reported favorable trends in their return on capital employed (ROCE), a key indicator of a company's profitability and growth prospects.
Sturm Ruger, a prominent firearms manufacturer, has demonstrated a consistently high ROCE of 22% over the past five years. The company's capital employed within the business has also increased by 35% during the same period. This combination suggests that Sturm Ruger can effectively reinvest its capital at high rates of return.
The calculation for Sturm Ruger's ROCE is as follows: Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities) = US$75m ÷ (US$397m - US$60m), based on the trailing twelve months to July 2023. This impressive return surpasses the Leisure industry average of 15%.
Meanwhile, Nordic American Tankers, an international tanker company, has also shown promising changes in its returns on capital. The company's ROCE stands at 20%, a figure calculated using the formula: Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities) = US$143m ÷ (US$882m - US$172m), based on the trailing twelve months to June 2023. This return is nearly on par with the Oil and Gas industry average of 21%.
Nordic American Tankers' positive trend is attributed to its transition from generating losses to earning returns on their capital employed. The company is using 30% less capital than it was five years ago, indicating increased efficiency in generating these returns.
However, there was a noticeable increase in the company's current liabilities over the period. Suppliers or short-term creditors now fund 19% of the business, an increase from five years ago. This change in financial structure could raise some aspects of risk.
Despite these promising trends, the market response has been mixed. While Nordic American Tankers' stock has returned a staggering 154% to shareholders over the last five years, Sturm Ruger's stock has only risen 1.4% over the same period.
These trends suggest that both companies are worth further research to ascertain if their promising ROCE trends will continue.
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