Yahoo Finance Capital Allocation Trends At Swiss Water Decaffeinated Coffee (TSE:SWP) Aren't Ideal
If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Swiss Water Decaffeinated Coffee (TSE:SWP) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. The formula for this calculation on Swiss Water Decaffeinated Coffee is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = CA$5.1m ÷ (CA$203m - CA$25m) (Based on the trailing twelve months to September 2023).
Thus, Swiss Water Decaffeinated Coffee has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Food industry average of 8.7%.
See our latest analysis for Swiss Water Decaffeinated Coffee
Historical performance is a great place to start when researching a stock so above you can see the gauge for Swiss Water Decaffeinated Coffee's ROCE against it's prior returns. If you'd like to look at how Swiss Water Decaffeinated Coffee has performed in the past in other metrics, you can view this free graph of Swiss Water Decaffeinated Coffee's past earnings, revenue and cash flow.
What Does the ROCE Trend For Swiss Water Decaffeinated Coffee Tell Us?
On the surface, the trend of ROCE at Swiss Water Decaffeinated Coffee doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.8% from 7.0% five years ago. 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
To conclude, we've found that Swiss Water Decaffeinated Coffee is reinvesting in the business, but returns have been falling. Since the stock has declined 43% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Swiss Water Decaffeinated Coffee has the makings of a multi-bagger.
If you want to know some of the risks facing Swiss Water Decaffeinated Coffee we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.
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.
