Returns On Capital At Heineken (AMS:HEIA) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Heineken (AMS:HEIA) we aren't filled with optimism, but let's investigate further.

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 Heineken:

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

0.062 = €2.0b ÷ (€43b - €11b) (Based on the trailing twelve months to December 2020).

So, Heineken has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Beverage industry average of 9.2%.

See our latest analysis for Heineken

In the above chart we have measured Heineken's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Heineken here for free.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Heineken. Unfortunately the returns on capital have diminished from the 9.5% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Heineken to turn into a multi-bagger.

Our Take On Heineken's ROCE

In summary, it's unfortunate that Heineken is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 21% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Heineken, we've discovered 1 warning sign that you should be aware of.

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