Investors Met With Slowing Returns on Capital At Kraft Heinz (NASDAQ:KHC)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Kraft Heinz (NASDAQ:KHC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Kraft Heinz, this is the formula:

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

0.062 = US$5.1b ÷ (US$91b - US$9.0b) (Based on the trailing twelve months to April 2023).

Thus, Kraft Heinz has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.7%.

Check out our latest analysis for Kraft Heinz

In the above chart we have measured Kraft Heinz's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kraft Heinz.

SWOT Analysis for Kraft Heinz

The Trend Of ROCE

Over the past five years, Kraft Heinz's ROCE has remained relatively flat while the business is using 26% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 6.2%, it's hard to get excited about these developments.

The Key Takeaway

It's a shame to see that Kraft Heinz is effectively shrinking in terms of its capital base. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 3 warning signs for Kraft Heinz that we think 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. 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.