Returns On Capital At Booz Allen Hamilton Holding (NYSE:BAH) Paint A Concerning Picture
There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Booz Allen Hamilton Holding (NYSE:BAH), it didn't seem to tick all of these boxes.
Understanding 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 Booz Allen Hamilton Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$571m ÷ (US$6.5b - US$1.6b) (Based on the trailing twelve months to December 2023).
Thus, Booz Allen Hamilton Holding has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 13%.
See our latest analysis for Booz Allen Hamilton Holding
Above you can see how the current ROCE for Booz Allen Hamilton Holding 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 Booz Allen Hamilton Holding .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Booz Allen Hamilton Holding, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 12%. 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.
What We Can Learn From Booz Allen Hamilton Holding's ROCE
While returns have fallen for Booz Allen Hamilton Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 183% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
Booz Allen Hamilton Holding does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
While Booz Allen Hamilton Holding 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.
