We Like These Underlying Return On Capital Trends At Dynasty Fine Wines Group (HKG:828)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Dynasty Fine Wines Group (HKG:828) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.086 = HK$22m ÷ (HK$531m - HK$272m) (Based on the trailing twelve months to June 2022).

So, Dynasty Fine Wines Group has an ROCE of 8.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.3%.

Our analysis indicates that 828 is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dynasty Fine Wines Group's ROCE against it's prior returns. 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?

It's great to see that Dynasty Fine Wines Group has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 8.6% on their capital employed. In regards to capital employed, Dynasty Fine Wines Group is using 26% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Dynasty Fine Wines Group could be selling under-performing assets since the ROCE is improving.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 51%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.

In Conclusion...

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. Astute investors may have an opportunity here because the stock has declined 24% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 3 warning signs with Dynasty Fine Wines Group (at least 1 which can't be ignored) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.