If I’d invested in BAE Systems shares 3 years ago, here’s how much I’d have now!

My uncle advised me to focus on war, sex, drugs, and rock ‘n’ roll if I wanted money. The reason is that the industry is expert in producing. BAE system (LSE:BA) is in the war zone, so it’s a big tick for the uncle. The company is Europe’s largest defense contractor. If I had invested in BAE Systems shares just three years ago, I would have doubled my money. Not many stocks I can tell.

The good thing is, not only in the last three years I will be richly rewarded. Whether I invested last year (30%) or 10 years ago (260%), I would consider it a worthwhile effort.

I invest to make money. BAE Systems certainly seems like a suitable investment based on its historical total returns. But let me look under the bonnet and assess the key metric for my investment – profit.

Increase in profit

The best measure of profitability for me is Return on Capital Employed (ROCE). It determines whether the company is making a profit on the capital employed.

From my point of view, this is a stable image. The company has used 40% more capital over the past five years, and its return on capital has remained stable at 10%. I consider this a standard return. But on a positive note, BAE Systems has consistently achieved these numbers. If this level of return can be maintained over a long run, I think it is a good reward for shareholders.

Of course, historical returns are not indicators of the future. Therefore, I have to grasp the firmer outlook of the company, and it is a mixed picture.

Outlook

The dividend is low compared to other aerospace and defense companies. Meanwhile, annual earnings are forecast to grow more slowly than the UK stock market.

However, I have to consider this against some positive tailwinds in the future. Despite the risk of anemic earnings growth, its earnings growth is expected to outpace the UK market as a whole.

Also, I think the stock looks cheap based on its valuation. This indicates that there may be a share price.

Second, the company makes most of its money in the US, where it has large manufacturing plants. A strong US dollar has made it cheaper to import the key metal that companies use. At the same time, a strong dollar means companies benefit from foreign exchange trends.

So, in the medium term, I expect lower production costs and greater demand. A combination of these factors will definitely affect the company’s stock price. City analysts have predicted a 20% increase in prices this year.

A repeat performance

I repeat, historical performance is not an indicator of the future. But clearly, over the last three, five, and 10 years, BAE Systems has demonstrated a strong track record of generating double total returns.

If I had invested £5,000 in this stock just three years ago, I would have received over £10,000 and some change.

Can the trick be replicated after the next three years? It’s a mixed picture. I need more guidance for the future from my company and business prospects.

If management expects a benign environment, I would probably buy some shares.