Yahoo Finance Bumi Armada Berhad (KLSE:ARMADA) Is Doing The Right Things To Multiply Its Share Price
There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in Bumi Armada Berhad's (KLSE:ARMADA) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for Bumi Armada Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = RM1.1b ÷ (RM12b - RM1.6b) (Based on the trailing twelve months to December 2022).
So, Bumi Armada Berhad has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 8.7% it's much better.
See our latest analysis for Bumi Armada Berhad
In the above chart we have measured Bumi Armada Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bumi Armada Berhad.
How Are Returns Trending?
Bumi Armada Berhad is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 110% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
In Conclusion...
In summary, we're delighted to see that Bumi Armada Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 20% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a separate note, we've found 1 warning sign for Bumi Armada Berhad you'll probably want to know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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