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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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think Swiss Water Decaffeinated Coffee (TSE:SWP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Swiss Water Decaffeinated Coffee is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = CA$5.6m ÷ (CA$198m - CA$40m) (Based on the trailing twelve months to March 2024).
Therefore, Swiss Water Decaffeinated Coffee has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.
See our latest analysis for Swiss Water Decaffeinated Coffee
Historical performance is a great place to start when researching a stock so above you can see the gauge for Swiss Water Decaffeinated Coffee's ROCE against it's prior returns. If you'd like to look at how Swiss Water Decaffeinated Coffee has performed in the past in other metrics, you can view this free graph of Swiss Water Decaffeinated Coffee's past earnings, revenue and cash flow.
So How Is Swiss Water Decaffeinated Coffee's ROCE Trending?
On the surface, the trend of ROCE at Swiss Water Decaffeinated Coffee doesn't inspire confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 3.5%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
In Conclusion...
From the above analysis, we find it rather worrisome that returns on capital and sales for Swiss Water Decaffeinated Coffee have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.