Bumi Armada Berhad (KLSE:ARMADA) Is Doing The Right Things To Multiply Its Share Price

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Bumi Armada Berhad (KLSE:ARMADA) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Bumi Armada Berhad, this is the formula:

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

0.083 = RM881m ÷ (RM13b - RM2.1b) (Based on the trailing twelve months to December 2020).

Therefore, Bumi Armada Berhad has an ROCE of 8.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.8%.

View our latest analysis for Bumi Armada Berhad

Above you can see how the current ROCE for Bumi Armada Berhad 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 The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Bumi Armada Berhad. The data shows that returns on capital have increased by 410% over the trailing five years. The company is now earning RM0.08 per dollar of capital employed. In regards to capital employed, Bumi Armada Berhad appears to been achieving more with less, since the business is using 28% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Our Take On Bumi Armada Berhad's ROCE

In a nutshell, we're pleased to see that Bumi Armada Berhad has been able to generate higher returns from less capital. Given the stock has declined 42% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Bumi Armada Berhad (of which 1 doesn't sit too well with us!) that you should know about.

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.

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This article by Simply Wall St is general in nature. 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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