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Today we are going to look at Willamette Valley Vineyards, Inc. (NASDAQ:WVVI) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Willamette Valley Vineyards:
0.065 = US$3.6m ÷ (US$61m – US$5.0m) (Based on the trailing twelve months to September 2018.)
So, Willamette Valley Vineyards has an ROCE of 6.5%.
Is Willamette Valley Vineyards’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Willamette Valley Vineyards’s ROCE is meaningfully below the Beverage industry average of 8.6%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Willamette Valley Vineyards’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Willamette Valley Vineyards’s current ROCE of 6.5% is lower than its ROCE in the past, which was 9.8%, 3 years ago. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. How cyclical is Willamette Valley Vineyards? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Willamette Valley Vineyards’s Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Willamette Valley Vineyards has total liabilities of US$5.0m and total assets of US$61m. Therefore its current liabilities are equivalent to approximately 8.3% of its total assets. With low levels of current liabilities, at least Willamette Valley Vineyards’s mediocre ROCE is not unduly boosted.
What We Can Learn From Willamette Valley Vineyards’s ROCE
Willamette Valley Vineyards looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better buy than Willamette Valley Vineyards. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.