The return trends at Nestlé (VTX:NESN) are not enticing

Did you know that there are some financial metrics that can provide clues about a potential multi-bagger? Among other things, we want to see two things; firstly, a growing one return on the capital employed (ROCE) and secondly an expansion of the company’s success Crowd of the capital employed. This shows us that it is a compounding machine, capable of continually reinvesting its profits back into the company and generating higher returns. Although when we looked at each other Nestle (VTX:NESN), it didn’t appear to meet all of those criteria.

Understand return on capital employed (ROCE).

If you’ve never worked with ROCE before, it measures the “return” (profit before taxes) that a company generates from the capital employed in its business. The formula for this calculation at Nestlé is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.16 = 16 billion CHF ÷ (136 billion CHF – 40 billion CHF) (Based on the last twelve months ended June 2024).

Therefore, Nestlé has a ROCE of 16%. On its own, that’s a standard return, but it’s much better than the 12% that the food industry earns.

Check out our latest analysis for Nestlé

Above you can see how Nestlé’s current ROCE compares to its past returns on capital, but there’s only so much you can tell from past history. If you are interested, you can see the analyst forecasts in our free Analyst report for Nestlé.

What does the ROCE trend tell us for Nestlé?

There wasn’t much to report on Nestlé’s earnings and the amount of capital employed, as both metrics have been stable over the past five years. Companies with these characteristics are usually mature and stable operations because they have already passed the growth phase. So unless we see a material change at Nestlé in terms of ROCE and the additional investments made, we wouldn’t hold our breath in assuming it is a multi-bagger company. Additionally, you will notice that Nestlé distributes a large portion (65%) of its profits to shareholders in the form of dividends. These mature companies tend to have reliable profits and there aren’t many opportunities to reinvest them. So the next best option is to put the profits into shareholders’ pockets.

The conclusion

In summary, Nestlé does not increase its profits but generates stable returns on the same amount of capital invested. Additionally, the stock’s total return to shareholders has remained flat over the past five years, which isn’t all that surprising. In any case, the stock does not have the features of a multi-bagger discussed above. So if that’s what you’re looking for, we think you’ll have better luck elsewhere.

The story continues

We noticed something else 1 warning sign versus Nestlé, which you may find interesting.

If you want to look for solid companies with great earnings, check this out free List of companies with good balance sheets and impressive returns on equity.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.