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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Samuel Heath & Sons (LON:HSM) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Samuel Heath & Sons, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = UK£368k ÷ (UK£14m - UK£1.9m) (Based on the trailing twelve months to March 2021).
Therefore, Samuel Heath & Sons has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Building industry average of 6.2%.
See our latest analysis for Samuel Heath & Sons
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 Samuel Heath & Sons' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Samuel Heath & Sons' ROCE Trending?
On the surface, the trend of ROCE at Samuel Heath & Sons doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.1% from 11% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line On Samuel Heath & Sons' ROCE
We're a bit apprehensive about Samuel Heath & Sons because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 46% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.