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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Heineken Holding (AMS:HEIO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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)
0.10 = €4.1b ÷ (€54b - €15b) (Based on the trailing twelve months to June 2024).
So, Heineken Holding has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 11%.
Check out our latest analysis for Heineken Holding
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 Heineken Holding's past further, check out this free graph covering Heineken Holding's past earnings, revenue and cash flow.
What Does the ROCE Trend For Heineken Holding Tell Us?
There hasn't been much to report for Heineken Holding's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Heineken Holding doesn't end up being a multi-bagger in a few years time.
Our Take On Heineken Holding's ROCE
In summary, Heineken Holding isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Heineken Holding has the makings of a multi-bagger.
If you want to continue researching Heineken Holding, you might be interested to know about the 4 warning signs that our analysis has discovered.