Booz Allen Hamilton Holding (NYSE:BAH) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Booz Allen Hamilton Holding (NYSE:BAH), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Booz Allen Hamilton Holding:

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

0.098 = US$470m ÷ (US$6.8b - US$2.0b) (Based on the trailing twelve months to June 2023).

So, Booz Allen Hamilton Holding has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Professional Services industry average of 12%.

View our latest analysis for Booz Allen Hamilton Holding

In the above chart we have measured Booz Allen Hamilton Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Booz Allen Hamilton Holding here for free.

What Does the ROCE Trend For Booz Allen Hamilton Holding Tell Us?

On the surface, the trend of ROCE at Booz Allen Hamilton Holding doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.8% from 21% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From 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 the stock has done incredibly well with a 176% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Booz Allen Hamilton Holding does come with some risks, and we've found 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.