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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Performance Shipping (NASDAQ:PSHG) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Performance Shipping:

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

0.058 = US$31m ÷ (US$554m - US$14m) (Based on the trailing twelve months to September 2025).

Thus, Performance Shipping has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Shipping industry average of 8.0%.

In the above chart we have measured Performance Shipping'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 Performance Shipping for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Performance Shipping. Over the past five years, ROCE has remained relatively flat at around 5.8% and the business has deployed 272% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In summary, Performance Shipping has simply been reinvesting capital and generating the same low rate of return as before. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 98% over the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

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.