If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Treasury Wine Estates (ASX:TWE), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Treasury Wine Estates is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = AU$514m ÷ (AU$6.7b - AU$1.0b) (Based on the trailing twelve months to June 2022).
So, Treasury Wine Estates has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Beverage industry average of 6.2%.
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, you can check out the forecasts from the analysts covering Treasury Wine Estates here for free.
What The Trend Of ROCE Can Tell Us
In terms of Treasury Wine Estates' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.1% for the last five years, and the capital employed within the business has risen 26% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On Treasury Wine Estates' ROCE
As we've seen above, Treasury Wine Estates' returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 3.4% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you're still interested in Treasury Wine Estates it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
Treasury Wine Estates
Treasury Wine Estates Limited operates as a wine company primarily in Australia, New Zealand, Asia, Europe, the Middle East, Africa, and the Americas.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
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Excellent balance sheet with proven track record.