Returns On Capital Are Showing Encouraging Signs At Dynasty Fine Wines Group (HKG:828)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)

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)

0.028 = HK$7.0m ÷ (HK$526m - HK$280m) (Based on the trailing twelve months to December 2022).

So, Dynasty Fine Wines Group has an ROCE of 2.8%. 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 past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Dynasty Fine Wines Group is reaping rewards from its investments and has now broken into profitability. The company now earns 2.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Dynasty Fine Wines Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 53%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Dynasty Fine Wines Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On Dynasty Fine Wines Group's ROCE

In summary, we're delighted to see that Dynasty Fine Wines Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 24% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Dynasty Fine Wines Group, we've spotted 4 warning signs, and 1 of them is potentially serious.

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.