The Returns On Capital At Swiss Water Decaffeinated Coffee (TSE:SWP) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.042 = CA$5.1m ÷ (CA$139m - CA$16m) (Based on the trailing twelve months to December 2020).

Thus, Swiss Water Decaffeinated Coffee has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.9%.

See 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 Does the ROCE Trend For Swiss Water Decaffeinated Coffee Tell Us?

When we looked at the ROCE trend at Swiss Water Decaffeinated Coffee, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.3% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Swiss Water Decaffeinated Coffee's ROCE

Bringing it all together, while we're somewhat encouraged by Swiss Water Decaffeinated Coffee's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 56% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Swiss Water Decaffeinated Coffee (of which 1 is significant!) that you should know about.

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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