Here's What To Make Of BAE Systems' (LON:BA.) Decelerating Rates Of Return
There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of BAE Systems (LON:BA.) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What Is It?
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 BAE Systems:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = UK£2.4b ÷ (UK£32b - UK£11b) (Based on the trailing twelve months to December 2023).
So, BAE Systems has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Aerospace & Defense industry average of 12%.
See our latest analysis for BAE Systems
Above you can see how the current ROCE for BAE Systems 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 analyst report for BAE Systems .
So How Is BAE Systems' ROCE Trending?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 37% more capital into its operations. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On BAE Systems' ROCE
To sum it up, BAE Systems has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 224% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
BAE Systems could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for BA. on our platform quite valuable.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
