If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Willamette Valley Vineyards (NASDAQ:WVVI) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Willamette Valley Vineyards, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = US$4.6m ÷ (US$75m - US$11m) (Based on the trailing twelve months to September 2020).
So, Willamette Valley Vineyards has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 13%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Willamette Valley Vineyards' ROCE against it's prior returns. If you're interested in investigating Willamette Valley Vineyards' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Willamette Valley Vineyards' ROCE Trending?
In terms of Willamette Valley Vineyards' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.8% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Willamette Valley Vineyards' ROCE
Bringing it all together, while we're somewhat encouraged by Willamette Valley Vineyards' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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.
Willamette Valley Vineyards does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.
While Willamette Valley Vineyards may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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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