The Returns At Schweiter Technologies (VTX:SWTQ) Aren't Growing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Schweiter Technologies (VTX:SWTQ), 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 Schweiter Technologies, this is the formula:

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

0.098 = CHF88m ÷ (CHF1.1b - CHF235m) (Based on the trailing twelve months to June 2022).

So, Schweiter Technologies has an ROCE of 9.8%. Ultimately, that's a low return and it under-performs the Building industry average of 27%.

Check out the opportunities and risks within the CH Building industry.

Above you can see how the current ROCE for Schweiter Technologies 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 report for Schweiter Technologies.

What Does the ROCE Trend For Schweiter Technologies Tell Us?

Things have been pretty stable at Schweiter Technologies, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Schweiter Technologies doesn't end up being a multi-bagger in a few years time. That probably explains why Schweiter Technologies has been paying out 82% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

The Key Takeaway

In a nutshell, Schweiter Technologies has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Schweiter Technologies and understanding them should be part of your investment process.

While Schweiter Technologies 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.