There Are Reasons To Feel Uneasy About Fevertree Drinks' (LON:FEVR) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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?

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. 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)

0.12 = UK£31m ÷ (UK£312m - UK£57m) (Based on the trailing twelve months to December 2022).

So, Fevertree Drinks has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 13%.

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 to see what analysts are forecasting going forward, you should check out our free report for Fevertree Drinks.

So How Is Fevertree Drinks' ROCE Trending?

In terms of Fevertree Drinks' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 41% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Fevertree Drinks' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Fevertree Drinks is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 63% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 1 warning sign for Fevertree Drinks that we think 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.