Heavitree Brewery's (LON:HVTA) Returns On Capital Not Reflecting Well On The Business

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Heavitree Brewery (LON:HVTA), the trends above didn't look too great.

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. To calculate this metric for Heavitree Brewery, this is the formula:

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

0.028 = UK£498k ÷ (UK£20m - UK£2.4m) (Based on the trailing twelve months to October 2020).

Thus, Heavitree Brewery has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 13%.

See our latest analysis for Heavitree Brewery

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Heavitree Brewery's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Heavitree Brewery's ROCE Trend?

There is reason to be cautious about Heavitree Brewery, given the returns are trending downwards. To be more specific, the ROCE was 8.1% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Heavitree Brewery becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Heavitree Brewery is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 18% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 4 warning signs for Heavitree Brewery (2 are a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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