Here's What's Concerning About Latham Group's (NASDAQ:SWIM) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Latham Group (NASDAQ:SWIM) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Latham Group is:

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

0.028 = US$20m ÷ (US$809m - US$71m) (Based on the trailing twelve months to March 2024).

So, Latham Group has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Leisure industry average of 13%.

View our latest analysis for Latham Group

Above you can see how the current ROCE for Latham Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Latham Group .

How Are Returns Trending?

On the surface, the trend of ROCE at Latham Group doesn't inspire confidence. Around four years ago the returns on capital were 5.8%, but since then they've fallen to 2.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Latham Group's ROCE

We're a bit apprehensive about Latham Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 90% in the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 3 warning signs with Latham Group (at least 2 which are significant) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.

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