Returns At Swiss Water Decaffeinated Coffee (TSE:SWP) Appear To Be Weighed Down

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Swiss Water Decaffeinated Coffee (TSE:SWP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. 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)

0.091 = CA$12m ÷ (CA$218m - CA$85m) (Based on the trailing twelve months to September 2022).

Thus, Swiss Water Decaffeinated Coffee has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Food industry average of 7.1%.

View 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're interested in investigating Swiss Water Decaffeinated Coffee's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Swiss Water Decaffeinated Coffee's ROCE Trend?

The returns on capital haven't changed much for Swiss Water Decaffeinated Coffee in recent years. The company has consistently earned 9.1% for the last five years, and the capital employed within the business has risen 103% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 39% of total assets, this reported ROCE would probably be less than9.1% because total capital employed would be higher.The 9.1% ROCE could be even lower if current liabilities weren't 39% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

In Conclusion...

Long story short, while Swiss Water Decaffeinated Coffee has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 58% in the last five years. 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 more about Swiss Water Decaffeinated Coffee, we've spotted 4 warning signs, and 3 of them are potentially serious.

While Swiss Water Decaffeinated Coffee may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.