Home Food and Recipes Shocking Revelation: The Disappointing Return Trends at Nestlé (VTX:NESN)

Shocking Revelation: The Disappointing Return Trends at Nestlé (VTX:NESN)

Shocking Revelation: The Disappointing Return Trends at Nestlé (VTX:NESN)

Is Nestlé a Potential Multi-Bagger Investment?

Investing in a business with substantial growth potential can be challenging but not impossible if we analyze key financial metrics. One important factor is the company’s ability to invest more capital into its business and generate increasing returns from that capital. This suggests that it is a business reinvesting profits at higher rates of return. However, after investigating Nestlé (VTX:NESN), it is evident that its current trends do not align with a multi-bagger investment.

Understanding Return On Capital Employed (ROCE)

ROCE measures the pre-tax profits generated by a company from the capital employed in its business. To calculate ROCE for Nestlé, analysts use the following formula:

ROCE = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

In the trailing twelve months to June 2023, Nestlé’s ROCE stands at 17%. While this is considered a satisfactory return, it surpasses the Food industry average of 13%.

SWX:NESN Return on Capital Employed November 3rd 2023

Comparing Nestlé’s current ROCE to its previous returns on capital gives some insights, but relying solely on historical data has limitations. For a more comprehensive analysis, you can explore the forecasts provided by analysts covering Nestlé.

Stagnant Returns and Capital Employed

Over the past five years, both Nestlé’s ROCE and capital employed have remained relatively unchanged. Such stability suggests that the company is in a mature phase, lacking significant growth opportunities. Consequently, Nestlé has been distributing 62% of its earnings to shareholders, as an alternative to reinvesting in its business.

Our Verdict on Nestlé’s ROCE

In conclusion, Nestlé has not been compounding its earnings and is generating stable returns on the same capital employed. With a mere 34% return to shareholders in the last five years, it is evident that investors are aware of these lackluster trends. Therefore, if you are seeking a multi-bagger investment, other opportunities may be more promising.

On another note, we have identified three warning signs for Nestlé that you should be aware of.

If you prefer investing in solid companies, we invite you to check out our free list of companies with solid balance sheets and high returns on equity.

Valuation Simplified

Gain insights into Nestlé’s potential over or undervaluation by exploring our comprehensive analysis. This analysis includes fair value estimates, risks and warnings, dividends, insider transactions, and financial health.

View the Free Analysis

Disclaimer: This article by Simply Wall St provides commentary based on historical data and analyst forecasts, using an unbiased methodology. It is not intended as financial advice and does not constitute a recommendation to buy or sell any stock. Individual objectives and financial situations are not considered. The analysis aims to provide long-term focused analysis driven by fundamental data. Additionally, the analysis may not account for the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.


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