What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Swatch Group (VTX:UHR) we aren't filled with optimism, but let's investigate further.
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. The formula for this calculation on Swatch Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = CHF709m ÷ (CHF14b - CHF1.3b) (Based on the trailing twelve months to June 2024).
So, Swatch Group has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 13%.
See our latest analysis for Swatch Group
In the above chart we have measured Swatch Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Swatch Group .
The Trend Of ROCE
There is reason to be cautious about Swatch Group, given the returns are trending downwards. About five years ago, returns on capital were 9.0%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Swatch Group to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that Swatch Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a separate note, we've found 3 warning signs for Swatch Group you'll probably want to know about.
While Swatch Group 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.
About SWX:UHR
Swatch Group
Designs, manufactures, and sells finished watches, jewelry, and watch movements and components worldwide.
Flawless balance sheet and fair value.
