Return Trends At Grace Wine Holdings (HKG:8146) Aren't Appealing

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 Grace Wine Holdings (HKG:8146) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Grace Wine Holdings:

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

0.024 = CN¥6.8m ÷ (CN¥331m - CN¥52m) (Based on the trailing twelve months to March 2023).

Thus, Grace Wine Holdings has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 11%.

Check out our latest analysis for Grace Wine Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Grace Wine Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Grace Wine Holdings, check out these free graphs here.

What Can We Tell From Grace Wine Holdings' ROCE Trend?

The returns on capital haven't changed much for Grace Wine Holdings in recent years. The company has employed 31% more capital in the last five years, and the returns on that capital have remained stable at 2.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Grace Wine Holdings' ROCE

Long story short, while Grace Wine Holdings has been reinvesting its capital, the returns that it's generating haven't increased. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 84% in the last five years. Therefore based on the analysis done in this article, we don't think Grace Wine Holdings has the makings of a multi-bagger.

Grace Wine Holdings does have some risks though, and we've spotted 2 warning signs for Grace Wine Holdings that you might be interested in.

While Grace Wine Holdings 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.