Returns On Capital Signal Tricky Times Ahead For Fevertree Drinks (LON:FEVR)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Fevertree Drinks (LON:FEVR) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Fevertree Drinks, this is the formula:

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

0.07 = UK£17m ÷ (UK£309m - UK£65m) (Based on the trailing twelve months to June 2023).

Thus, Fevertree Drinks has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Beverage industry average of 15%.

See our latest analysis for Fevertree Drinks

Above you can see how the current ROCE for Fevertree Drinks compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Fevertree Drinks here for free.

What The Trend Of ROCE Can Tell Us

In terms of Fevertree Drinks' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 44% over the last five years. However it looks like Fevertree Drinks might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Fevertree Drinks' ROCE

In summary, Fevertree Drinks is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 55% 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.

Like most companies, Fevertree Drinks does come with some risks, and we've found 1 warning sign that you should be aware of.

While Fevertree Drinks 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.