Booz Allen Hamilton Holding (NYSE:BAH) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Booz Allen Hamilton Holding (NYSE:BAH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Booz Allen Hamilton Holding, this is the formula:

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

0.089 = US$495m ÷ (US$7.2b - US$1.6b) (Based on the trailing twelve months to September 2023).

Thus, Booz Allen Hamilton Holding has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 12%.

Check out our latest analysis for Booz Allen Hamilton Holding

Above you can see how the current ROCE for Booz Allen Hamilton Holding 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 Booz Allen Hamilton Holding here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Booz Allen Hamilton Holding doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 8.9%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Booz Allen Hamilton Holding's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Booz Allen Hamilton Holding is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 198% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to know some of the risks facing Booz Allen Hamilton Holding we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

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. 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.