Dynasty Fine Wines Group (HKG:828) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Dynasty Fine Wines Group (HKG:828) so let's look a bit deeper.

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. The formula for this calculation on Dynasty Fine Wines Group is:

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

0.02 = HK$5.9m ÷ (HK$579m - HK$278m) (Based on the trailing twelve months to December 2023).

Thus, Dynasty Fine Wines Group has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Beverage industry average of 11%.

See our latest analysis for Dynasty Fine Wines Group

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'd like to look at how Dynasty Fine Wines Group has performed in the past in other metrics, you can view this free graph of Dynasty Fine Wines Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Dynasty Fine Wines Group Tell Us?

Dynasty Fine Wines Group has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 2.0% on its capital. In addition to that, Dynasty Fine Wines Group is employing 94% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 48%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Dynasty Fine Wines Group's ROCE

In summary, it's great to see that Dynasty Fine Wines Group has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 47% over the last three years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Dynasty Fine Wines Group does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

While Dynasty Fine Wines Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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