To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Coffee Holding (NASDAQ:JVA) 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)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Coffee Holding, this is the formula:

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

0.058 = US$1.9m ÷ (US$44m - US$10m) (Based on the trailing twelve months to January 2022).

Thus, Coffee Holding has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Food industry average of 9.3%.

View our latest analysis for Coffee Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Coffee Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Coffee Holding, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Coffee Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.8% from 14% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Coffee Holding's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Coffee Holding have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 34% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Coffee Holding (including 1 which is concerning) .

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.