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

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Royal Boskalis Westminster (AMS:BOKA), so let's see why.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Royal Boskalis Westminster:

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).

Thus, Royal Boskalis Westminster has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.8%.

Check out 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.

So How Is Royal Boskalis Westminster's ROCE Trending?

We are a bit anxious about the trends of ROCE at Royal Boskalis Westminster. Unfortunately, returns have declined substantially over the last five years to the 3.9% we see today. 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.

What We Can Learn From Royal Boskalis Westminster's ROCE

In summary, it's unfortunate that Royal Boskalis Westminster is shrinking its capital base and also generating lower returns. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Royal Boskalis Westminster does have some risks though, and we've spotted 1 warning sign for Royal Boskalis Westminster that you might be interested in.

While Royal Boskalis Westminster isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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