Returns On Capital At HELMA Eigenheimbau (ETR:H5E) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think HELMA Eigenheimbau (ETR:H5E) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for HELMA Eigenheimbau:

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

0.089 = €28m ÷ (€440m - €128m) (Based on the trailing twelve months to June 2021).

Thus, HELMA Eigenheimbau has an ROCE of 8.9%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 11%.

See our latest analysis for HELMA Eigenheimbau

Above you can see how the current ROCE for HELMA Eigenheimbau compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for HELMA Eigenheimbau.

What Does the ROCE Trend For HELMA Eigenheimbau Tell Us?

In terms of HELMA Eigenheimbau's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.9% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, HELMA Eigenheimbau has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On HELMA Eigenheimbau's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that HELMA Eigenheimbau is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 47% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

HELMA Eigenheimbau does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While HELMA Eigenheimbau isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.