Samuel Heath & Sons (LON:HSM) Will Be Hoping To Turn Its Returns On Capital Around
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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Samuel Heath & Sons (LON:HSM), we've spotted some signs that it could be struggling, so let's investigate.
Our free stock report includes 2 warning signs investors should be aware of before investing in Samuel Heath & Sons. Read for free now.
Return On Capital Employed (ROCE): What Is It?
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 Samuel Heath & Sons, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = UK£843k ÷ (UK£15m - UK£1.6m) (Based on the trailing twelve months to September 2024).
Therefore, Samuel Heath & Sons has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Building industry average of 13%.
Check out our latest analysis for Samuel Heath & Sons
AIM:HSM Return on Capital Employed May 8th 2025
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'd like to look at how Samuel Heath & Sons has performed in the past in other metrics, you can view this free graph of Samuel Heath & Sons' past earnings, revenue and cash flow.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Samuel Heath & Sons. Unfortunately the returns on capital have diminished from the 10% 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 Samuel Heath & Sons becoming one if things continue as they have.
Our Take On Samuel Heath & Sons' ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 43% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
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