Yahoo Finance Should You Like Booz Allen Hamilton Holding Corporation’s (NYSE:BAH) High Return On Capital Employed?
Today we'll look at Booz Allen Hamilton Holding Corporation (NYSE:BAH) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Booz Allen Hamilton Holding:
0.19 = US$650m ÷ (US$4.6b - US$1.2b) (Based on the trailing twelve months to December 2019.)
Therefore, Booz Allen Hamilton Holding has an ROCE of 19%.
Check out our latest analysis for Booz Allen Hamilton Holding
Does Booz Allen Hamilton Holding Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Booz Allen Hamilton Holding's ROCE is meaningfully better than the 10% average in the IT industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Booz Allen Hamilton Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can click on the image below to see (in greater detail) how Booz Allen Hamilton Holding's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Booz Allen Hamilton Holding's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Booz Allen Hamilton Holding has total assets of US$4.6b and current liabilities of US$1.2b. As a result, its current liabilities are equal to approximately 25% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Booz Allen Hamilton Holding's ROCE
This is good to see, and with a sound ROCE, Booz Allen Hamilton Holding could be worth a closer look. There might be better investments than Booz Allen Hamilton Holding out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Booz Allen Hamilton Holding better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
This article by Simply Wall St is general in nature. 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. Thank you for reading.
