Swiss Water Decaffeinated Coffee's (TSE:SWP) Returns On Capital Not Reflecting Well On The Business

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Swiss Water Decaffeinated Coffee (TSE:SWP), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Swiss Water Decaffeinated Coffee, this is the formula:

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

0.053 = CA$6.7m ÷ (CA$168m - CA$42m) (Based on the trailing twelve months to December 2021).

So, Swiss Water Decaffeinated Coffee has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.9%.

Check out our latest analysis for Swiss Water Decaffeinated Coffee

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 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. Over the last five years, returns on capital have decreased to 5.3% from 8.1% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Swiss Water Decaffeinated Coffee's current liabilities have increased over the last five years to 25% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.3%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

While returns have fallen for Swiss Water Decaffeinated Coffee in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 47% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Swiss Water Decaffeinated Coffee does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are potentially serious...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.