Returns At HeidelbergCement (ETR:HEI) Appear To Be Weighed Down

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at HeidelbergCement (ETR:HEI) and its ROCE trend, we weren't exactly thrilled.

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 HeidelbergCement:

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

0.077 = €2.0b ÷ (€32b - €5.9b) (Based on the trailing twelve months to December 2020).

Thus, HeidelbergCement has an ROCE of 7.7%. On its own, that's a low figure but it's around the 9.3% average generated by the Basic Materials industry.

View our latest analysis for HeidelbergCement

Above you can see how the current ROCE for HeidelbergCement compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at HeidelbergCement, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if HeidelbergCement doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that HeidelbergCement has been paying out a decent 32% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

Our Take On HeidelbergCement's ROCE

We can conclude that in regards to HeidelbergCement's returns on capital employed and the trends, there isn't much change to report on. And investors may be recognizing these trends since the stock has only returned a total of 15% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with HeidelbergCement and understanding these should be part of your investment process.

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

If you’re looking to trade HeidelbergCement, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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