Investors Will Want Bumi Armada Berhad's (KLSE:ARMADA) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Bumi Armada Berhad (KLSE:ARMADA) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Bumi Armada Berhad:

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

0.12 = RM918m ÷ (RM11b - RM3.3b) (Based on the trailing twelve months to December 2023).

Thus, Bumi Armada Berhad has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 9.8% generated by the Energy Services industry.

Check out our latest analysis for Bumi Armada Berhad

roce

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're interested, you can view the analysts predictions in our free analyst report for Bumi Armada Berhad .

So How Is Bumi Armada Berhad's ROCE Trending?

Bumi Armada Berhad has not disappointed with their ROCE growth. 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 216% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

One more thing to note, Bumi Armada Berhad has decreased current liabilities to 29% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Bumi Armada Berhad's ROCE

As discussed above, Bumi Armada Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 224% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Bumi Armada Berhad does have some risks though, and we've spotted 3 warning signs for Bumi Armada Berhad that you might be interested in.

While Bumi Armada Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.