Some Investors May Be Worried About Bowman Consulting Group's (NASDAQ:BWMN) Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Bowman Consulting Group (NASDAQ:BWMN), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Bowman Consulting Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = US$3.2m ÷ (US$205m - US$54m) (Based on the trailing twelve months to September 2022).
So, Bowman Consulting Group has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.1%.
View our latest analysis for Bowman Consulting Group
Above you can see how the current ROCE for Bowman Consulting Group 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 report on analyst forecasts for the company.
What Does the ROCE Trend For Bowman Consulting Group Tell Us?
When we looked at the ROCE trend at Bowman Consulting Group, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 2.1% from 6.1% two years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Bowman Consulting Group has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Bowman Consulting Group's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Bowman Consulting Group. And the stock has followed suit returning a meaningful 13% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you want to continue researching Bowman Consulting Group, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Bowman Consulting Group 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.
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