Booz Allen Hamilton (NYSE:BAH) Excels in Quality Screening with High ROIC and Strong Cash Flow

Booz Allen Hamilton Holding Corp. (NYSE:BAH) has been identified through a systematic investment screening process known as the Caviar Cruise strategy. This method is focused on finding superior companies appropriate for long-term, buy-and-hold investment. The process stresses measurable financial health and operational performance, concentrating on firms with solid historical revenue and profit expansion, high returns on invested capital, acceptable debt levels compared to cash flow, and a history of reliably turning accounting profits into free cash. The goal is to find businesses with lasting competitive strengths and effective operations that can provide lasting value over long timeframes.

Financial Performance and Growth

The Caviar Cruise process assigns great weight to a company's historical growth path and profitability. It looks for companies that have not only increased their revenue but have also enhanced their bottom-line performance over time.

• EBIT Growth: BAH shows a solid 5-year EBIT Compound Annual Growth Rate (CAGR) of 13.55%, greatly surpassing the screen's minimum requirement of 5%. This points to strong and increasing operational profitability.
• Profitability Expansion: A central idea of the screen is that EBIT growth should be faster than revenue growth, indicating better operational efficiency and possible pricing power. While a 5-year revenue CAGR was not available in the provided data, the company's recent one-year revenue growth of 36.12% and a 5-year average of 9.93% point to a healthy, growing business, with the high EBIT growth confirming positive operational effects.

Outstanding Capital Efficiency

For investors focused on quality, the return a company earns on its invested capital is a critical measure. It shows management's ability to assign resources to profitable projects.

• Return on Invested Capital (ROIC): BAH displays outstanding capital efficiency, with an ROIC (excluding cash, goodwill, and intangibles) of 65.84%. This is much higher than the screen's strict 15% requirement and puts the company in a top group, showing that every dollar invested in the business is creating significant returns. A high ROIC is frequently a sign of a company with a lasting competitive edge.

Balance Sheet and Cash Flow Health

Quality investing demands a company to have a strong financial foundation. The Caviar Cruise screen assesses debt sustainability and the reliability of reported earnings.

• Debt Management: The screen requires a Debt-to-Free Cash Flow ratio under 5. BAH's ratio of 4.03 is within this acceptable limit, implying that the company could in theory pay off its complete debt with about four years of its present free cash flow, indicating acceptable leverage.
• High Profit Quality: This measure, which compares free cash flow to net income, is a main indicator of earnings strength. BAH's 5-year average Profit Quality of 114.23% is very good, well above the 75% standard. This means the company is producing more cash flow than its accounting profits indicate, a positive signal of financial soundness and reliable earnings.

Fundamental Analysis Overview

An examination of the detailed fundamental report for Booz Allen Hamilton shows a company with several notable positive attributes and some points for review. The overall fundamental rating is 6 out of 10.

• Profitability is a main positive, with a rating of 8 out of 10. The company performs well in returns on assets, equity, and invested capital, doing much better than most of its competitors in the Professional Services industry. Its profit and operating margins have also displayed positive trends.
• Valuation seems acceptable, with a score of 5 out of 10. Important measures like the P/E and Forward P/E ratios are considered fair or moderately appealing compared to both industry competitors and the wider S&P 500.
• The dividend profile is good, rated 7 out of 10, backed by a consistent history of payments and growth, although the continuation of future dividend growth is mentioned as an area to watch.
• Financial Health shows a varied situation, with a score of 5 out of 10. While the company has a satisfactory Altman-Z score and sufficient liquidity ratios, its somewhat high Debt-to-Equity ratio is identified as a minor issue.

Read the full fundamental analysis report for BAH here.

Conclusion

Booz Allen Hamilton makes a strong argument for investors using a quality-oriented strategy. The company matches well with the main measurable filters of the Caviar Cruise screen, especially performing well in capital efficiency with a very high ROIC and displaying reliable earnings through better cash flow conversion. Its solid historical EBIT growth and acceptable debt level further support its profile as an established, well-managed firm. While investors should note the company's leverage and slowing future growth projections, its fundamental positives in profitability and valuation make it a stock deserving of more study for a long-term quality portfolio.

To find other companies that meet the Caviar Cruise quality screen, you can run the screen yourself here.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an endorsement of any investment strategy. All investments involve risk, including the possible loss of principal. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.