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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, Bumi Armada Berhad (KLSE:ARMADA) looks quite promising in regards to its trends of return on capital.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Bumi Armada Berhad is:

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

0.14 = RM1.2b ÷ (RM9.8b - RM1.0b) (Based on the trailing twelve months to September 2024).

Therefore, Bumi Armada Berhad has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Energy Services industry average of 13%.

See 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'd like, you can check out the forecasts from the analysts covering Bumi Armada Berhad for free.

How Are Returns Trending?

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 193% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 22% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a related note, the company's ratio of current liabilities to total assets has decreased to 10%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

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. Since the stock has returned a solid 58% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Bumi Armada Berhad can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 3 warning signs for Bumi Armada Berhad you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.