Swatch Group (VTX:UHR) Has Some Way To Go To Become A Multi-Bagger
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. 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 Swatch Group (VTX:UHR) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Swatch Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CHF1.3b ÷ (CHF14b - CHF1.2b) (Based on the trailing twelve months to June 2023).
So, Swatch Group has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Luxury industry average it falls behind.
View our latest analysis for Swatch Group
In the above chart we have measured Swatch 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 report for Swatch Group.
What The Trend Of ROCE Can Tell Us
Over the past five years, Swatch Group's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Swatch Group to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Swatch Group has been paying out a decent 39% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Key Takeaway
In a nutshell, Swatch Group has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
One more thing, we've spotted 1 warning sign facing Swatch Group that you might find interesting.
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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.
