To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Swatch Group (VTX:UHR) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Swatch Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = CHF1.0b ÷ (CHF14b - CHF1.4b) (Based on the trailing twelve months to December 2021).
Thus, Swatch Group has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.
Check out 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, you can check out the forecasts from the analysts covering Swatch Group here for free.
What Does the ROCE Trend For Swatch Group Tell Us?
Swatch Group is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 23% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line On Swatch Group's ROCE
To sum it up, Swatch Group is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing, we've spotted 1 warning sign facing Swatch Group that you might find interesting.
While Swatch Group 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.
About SWX:UHR
Swatch Group
Designs, manufactures, and sells finished watches, jewelry, and watch movements and components worldwide.
Flawless balance sheet and fair value.
