When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Heavitree Brewery (LON:HVTA), we weren't too upbeat about how things were going.

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. The formula for this calculation on Heavitree Brewery is:

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

0.053 = UK£1.1m ÷ (UK£22m - UK£2.2m) (Based on the trailing twelve months to April 2024).

Therefore, Heavitree Brewery has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.6%.

See our latest analysis for Heavitree Brewery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Heavitree Brewery's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Heavitree Brewery.

We are a bit worried about the trend of returns on capital at Heavitree Brewery. To be more specific, the ROCE was 8.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Heavitree Brewery becoming one if things continue as they have.

In summary, it's unfortunate that Heavitree Brewery is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 13% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.