Returns At Treasury Wine Estates (ASX:TWE) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Treasury Wine Estates (ASX:TWE) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Treasury Wine Estates:

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

0.089 = AU$482m ÷ (AU$6.3b - AU$879m) (Based on the trailing twelve months to June 2021).

Thus, Treasury Wine Estates has an ROCE of 8.9%. On its own, that's a low figure but it's around the 7.5% average generated by the Beverage industry.

View our latest analysis for Treasury Wine Estates

In the above chart we have measured Treasury Wine Estates' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Treasury Wine Estates.

How Are Returns Trending?

Treasury Wine Estates is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 25% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Treasury Wine Estates' ROCE

To bring it all together, Treasury Wine Estates has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 4.8% to shareholders. So with that in mind, we think the stock deserves further research.

If you want to continue researching Treasury Wine Estates, you might be interested to know about the 1 warning sign that our analysis has discovered.

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

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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.