Will The ROCE Trend At Bumi Armada Berhad (KLSE:ARMADA) Continue?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Bumi Armada Berhad (KLSE:ARMADA) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Bumi Armada Berhad:

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

0.074 = RM815m ÷ (RM13b - RM2.3b) (Based on the trailing twelve months to September 2020).

Therefore, Bumi Armada Berhad has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Energy Services industry average of 8.6%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Bumi Armada Berhad.

What The Trend Of ROCE Can Tell Us

Bumi Armada Berhad has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 239% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a related note, the company's ratio of current liabilities to total assets has decreased to 17%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

To bring it all together, Bumi Armada Berhad has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 65% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Bumi Armada Berhad does have some risks though, and we've spotted 1 warning sign for Bumi Armada Berhad that you might be interested in.

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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