Is Royal Boskalis Westminster (AMS:BOKA) Using Capital Effectively?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Royal Boskalis Westminster (AMS:BOKA), so let's see why.

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 Royal Boskalis Westminster, this is the formula:

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

0.051 = €145m ÷ (€4.6b - €1.8b) (Based on the trailing twelve months to June 2020).

Therefore, Royal Boskalis Westminster has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Royal Boskalis Westminster Tell Us?

In terms of Royal Boskalis Westminster's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 5.1% we see today. In addition to that, Royal Boskalis Westminster is now employing 38% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 39%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

To see Royal Boskalis Westminster reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. 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.

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