There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Dynasty Fine Wines Group's (HKG:828) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Dynasty Fine Wines Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = HK$6.8m ÷ (HK$596m - HK$357m) (Based on the trailing twelve months to June 2021).
So, Dynasty Fine Wines Group has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 10%.
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're interested in investigating Dynasty Fine Wines Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Dynasty Fine Wines Group Tell Us?
Like most people, we're pleased that Dynasty Fine Wines Group is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 46% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Dynasty Fine Wines Group could be selling under-performing assets since the ROCE is improving.
On a separate but related note, it's important to know that Dynasty Fine Wines Group has a current liabilities to total assets ratio of 60%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In the end, Dynasty Fine Wines Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 36% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Dynasty Fine Wines Group, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.