Returns At Bumi Armada Berhad (KLSE:ARMADA) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Bumi Armada Berhad's (KLSE:ARMADA) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.10 = RM786m ÷ (RM12b - RM4.0b) (Based on the trailing twelve months to September 2023).

So, Bumi Armada Berhad has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.2% generated by the Energy Services industry.

View our latest analysis for Bumi Armada Berhad

In the above chart we have measured Bumi Armada Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Bumi Armada Berhad for free.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Bumi Armada Berhad. We found that the returns on capital employed over the last five years have risen by 145%. The company is now earning RM0.1 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 23% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Bumi Armada Berhad may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line

From what we've seen above, Bumi Armada Berhad has managed to increase it's returns on capital all the while reducing it's capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 1 warning sign with Bumi Armada Berhad and understanding this should be part of your investment process.

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. 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.