Investors Could Be Concerned With Royal Boskalis Westminster's (AMS:BOKA) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Royal Boskalis Westminster (AMS:BOKA), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

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 Royal Boskalis Westminster is:

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

0.039 = €111m ÷ (€4.5b - €1.7b) (Based on the trailing twelve months to December 2020).

So, Royal Boskalis Westminster has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

See our latest analysis for Royal Boskalis Westminster

Above you can see how the current ROCE for Royal Boskalis Westminster 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 Royal Boskalis Westminster here for free.

The Trend Of ROCE

The trend of returns that Royal Boskalis Westminster is generating are raising some concerns. To be more specific, today's ROCE was 11% five years ago but has since fallen to 3.9%. On top of that, the business is utilizing 40% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line

To see Royal Boskalis Westminster reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Royal Boskalis Westminster you'll probably want to know about.

While Royal Boskalis Westminster 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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