Returns On Capital Signal Tricky Times Ahead For Treasury Wine Estates (ASX:TWE)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Treasury Wine Estates (ASX:TWE) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.083 = AU$497m ÷ (AU$7.1b - AU$1.1b) (Based on the trailing twelve months to June 2023).

Thus, Treasury Wine Estates has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 3.8% generated by the Beverage industry, it's much better.

Check out our latest analysis for Treasury Wine Estates

Above you can see how the current ROCE for Treasury Wine Estates compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Treasury Wine Estates' ROCE Trending?

On the surface, the trend of ROCE at Treasury Wine Estates doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.3%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Treasury Wine Estates' ROCE

Bringing it all together, while we're somewhat encouraged by Treasury Wine Estates' reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Treasury Wine Estates (including 1 which is potentially serious) .

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.