The Returns On Capital At Foley Wines (NZSE:FWL) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Foley Wines (NZSE:FWL), we don't think it's current trends fit the mold of a multi-bagger.

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 Foley Wines, this is the formula:

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

0.031 = NZ$6.8m ÷ (NZ$238m - NZ$19m) (Based on the trailing twelve months to December 2024).

Thus, Foley Wines has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Beverage industry average of 12%.

See our latest analysis for Foley Wines

Historical performance is a great place to start when researching a stock so above you can see the gauge for Foley Wines' ROCE against it's prior returns. If you're interested in investigating Foley Wines' past further, check out this free graph covering Foley Wines' past earnings, revenue and cash flow.

What Does the ROCE Trend For Foley Wines Tell Us?

In terms of Foley Wines' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.1% from 4.9% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Foley Wines' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Foley Wines. And there could be an opportunity here if other metrics look good too, because the stock has declined 56% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Foley Wines does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Foley Wines isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.