These Return Metrics Don't Make Heineken Holding (AMS:HEIO) Look Too Strong

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Heineken Holding (AMS:HEIO), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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 Heineken Holding:

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

0.063 = €2.0b ÷ (€43b - €11b) (Based on the trailing twelve months to December 2020).

Thus, Heineken Holding has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 9.2%.

View our latest analysis for Heineken Holding

In the above chart we have measured Heineken Holding's 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Heineken Holding Tell Us?

In terms of Heineken Holding's historical ROCE movements, the trend doesn't inspire confidence. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Heineken Holding becoming one if things continue as they have.

Our Take On Heineken Holding's ROCE

In summary, it's unfortunate that Heineken Holding is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 19% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 2 warning signs with Heineken Holding (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While Heineken Holding 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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