Coffee Holding (NASDAQ:JVA) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Coffee Holding (NASDAQ:JVA), we don't think it's current trends fit the mold of a multi-bagger.

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 Coffee Holding is:

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

0.0026 = US$82k ÷ (US$41m - US$8.9m) (Based on the trailing twelve months to April 2022).

So, Coffee Holding has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Food industry average of 9.3%.

Check out our latest analysis for Coffee Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Coffee Holding's ROCE against it's prior returns. If you're interested in investigating Coffee Holding's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Coffee Holding's ROCE Trend?

In terms of Coffee Holding's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 0.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

In summary, Coffee Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 38% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Coffee Holding, we've spotted 4 warning signs, and 1 of them shouldn't be ignored.

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.