If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That’s why when we briefly looked at Booz Allen Hamilton Holding’s (NYSE:BAH) ROCE trend, we were very happy with what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Booz Allen Hamilton Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = US$1.0b ÷ (US$6.6b – US$1.7b) (Based on…
