Booz Allen Hamilton Holding's (NYSE:BAH) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Understanding 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 Booz Allen Hamilton Holding is:

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

0.14 = US$684m ÷ (US$6.3b - US$1.6b) (Based on the trailing twelve months to December 2022).

So, Booz Allen Hamilton Holding has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Professional Services industry.

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 20%, but since then they've fallen to 14%. 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.

The Bottom Line 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 162% to shareholders in the last five years. 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.

While Booz Allen Hamilton Holding 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. 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.