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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Fevertree Drinks (LON:FEVR) 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)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Fevertree Drinks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = UK£24m ÷ (UK£297m - UK£51m) (Based on the trailing twelve months to June 2024).
Therefore, Fevertree Drinks has an ROCE of 9.7%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 16%.
See our latest analysis for Fevertree Drinks
Above you can see how the current ROCE for Fevertree Drinks compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Fevertree Drinks .
What Can We Tell From Fevertree Drinks' ROCE Trend?
On the surface, the trend of ROCE at Fevertree Drinks doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.7% from 38% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
To conclude, we've found that Fevertree Drinks is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 66% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you'd like to know about the risks facing Fevertree Drinks, we've discovered 2 warning signs that you should be aware of.