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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Swiss Water Decaffeinated Coffee (TSE:SWP) and its trend of ROCE, we really liked what we saw.
Understanding 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. Analysts use this formula to calculate it for Swiss Water Decaffeinated Coffee:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = CA$11m ÷ (CA$209m - CA$48m) (Based on the trailing twelve months to September 2024).
So, Swiss Water Decaffeinated Coffee has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Food industry average of 9.2%.
View our latest analysis for Swiss Water Decaffeinated Coffee
Above you can see how the current ROCE for Swiss Water Decaffeinated Coffee compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Swiss Water Decaffeinated Coffee .
So How Is Swiss Water Decaffeinated Coffee's ROCE Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 48% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From Swiss Water Decaffeinated Coffee's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Swiss Water Decaffeinated Coffee has. Given the stock has declined 46% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to know some of the risks facing Swiss Water Decaffeinated Coffee we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.