The Returns On Capital At Latham Group (NASDAQ:SWIM) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Latham Group (NASDAQ:SWIM) and its ROCE trend, we weren't exactly thrilled.

Our free stock report includes 1 warning sign investors should be aware of before investing in Latham Group. Read for free now.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Latham Group:

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

0.025 = US$18m ÷ (US$794m - US$71m) (Based on the trailing twelve months to December 2024).

So, Latham Group has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Leisure industry average of 12%.

View our latest analysis for Latham Group

In the above chart we have measured Latham 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 Latham Group .

How Are Returns Trending?

When we looked at the ROCE trend at Latham Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.3% over the last five years. 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.

In Conclusion...

In summary, we're somewhat concerned by Latham Group's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Latham Group that you might find interesting.

While Latham 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.