What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Booz Allen Hamilton Holding (NYSE:BAH) looks decent, right now, so lets see what the trend of returns can tell us.
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. To calculate this metric for Booz Allen Hamilton Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = US$677m ÷ (US$4.7b – US$1.2b) (Based on the trailing twelve months to June 2020).
So, Booz Allen Hamilton Holding has an ROCE of 20%. In absolute terms, that’s a satisfactory return, but compared to the IT industry average of 10% it’s much better.
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 report on analyst forecasts for the company.
The Trend Of ROCE
While the returns on capital are good, they haven’t moved much. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 70% in that time. 20% is a pretty standard return, and it provides some comfort knowing that Booz Allen Hamilton Holding has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The main thing to remember is that Booz Allen Hamilton Holding has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 248% return they’ve received over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
If you’d like to know about the risks facing Booz Allen Hamilton Holding, we’ve discovered 1 warning sign that you should be aware of.
While Booz Allen Hamilton Holding may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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