We Like These Underlying Return On Capital Trends At Heidelberg Materials (ETR:HEI)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Heidelberg Materials (ETR:HEI) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Heidelberg Materials:

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

0.098 = €2.7b ÷ (€35b - €7.4b) (Based on the trailing twelve months to June 2024).

So, Heidelberg Materials has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 8.7%.

Check out our latest analysis for Heidelberg Materials

In the above chart we have measured Heidelberg Materials' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Heidelberg Materials .

What The Trend Of ROCE Can Tell Us

Heidelberg Materials has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 71% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Heidelberg Materials has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 175% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Heidelberg Materials can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Heidelberg Materials and understanding this should be part of your investment process.

While Heidelberg Materials may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.