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Willamette Valley Vineyards (NASDAQ:WVVI) Might Be Having Difficulty Using Its Capital Effectively

·2 min read

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Willamette Valley Vineyards (NASDAQ:WVVI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Willamette Valley Vineyards is:

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

0.055 = US$4.1m ÷ (US$85m - US$11m) (Based on the trailing twelve months to September 2021).

So, Willamette Valley Vineyards has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 13%.

Check out our latest analysis for Willamette Valley Vineyards

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While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Willamette Valley Vineyards' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Willamette Valley Vineyards' ROCE Trend?

On the surface, the trend of ROCE at Willamette Valley Vineyards doesn't inspire confidence. To be more specific, ROCE has fallen from 9.3% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Willamette Valley Vineyards. These trends are starting to be recognized by investors since the stock has delivered a 32% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know more about Willamette Valley Vineyards, we've spotted 5 warning signs, and 1 of them shouldn't be ignored.

While Willamette Valley Vineyards isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.