The Returns At Swiss Water Decaffeinated Coffee (TSE:SWP) Aren't Growing

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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?

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)

0.075 = CA$13m ÷ (CA$219m - CA$41m) (Based on the trailing twelve months to December 2022).

Therefore, Swiss Water Decaffeinated Coffee has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Food industry average of 7.3%.

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.

What The Trend Of ROCE Can Tell Us

In terms of Swiss Water Decaffeinated Coffee's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 7.5% and the business has deployed 167% more capital into its operations. 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.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 19% of total assets, this reported ROCE would probably be less than7.5% because total capital employed would be higher.The 7.5% ROCE could be even lower if current liabilities weren't 19% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

Our Take On Swiss Water Decaffeinated Coffee's ROCE

Long story short, while Swiss Water Decaffeinated Coffee has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 50% over the last five years, investors may not be too optimistic on this trend improving either. 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.

Swiss Water Decaffeinated Coffee does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those make us uncomfortable...

While Swiss Water Decaffeinated Coffee isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.