Be Wary Of Fevertree Drinks (LON:FEVR) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Fevertree Drinks (LON:FEVR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Fevertree Drinks is:

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

0.19 = UK£56m ÷ (UK£336m - UK£51m) (Based on the trailing twelve months to December 2021).

Therefore, Fevertree Drinks has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 14% generated by the Beverage industry.

View our latest analysis for Fevertree Drinks

roce

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.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Fevertree Drinks doesn't inspire confidence. To be more specific, ROCE has fallen from 35% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take 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 55% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Fevertree Drinks does have some risks though, and we've spotted 1 warning sign for Fevertree Drinks that you might be interested in.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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