What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Willamette Valley Vineyards (NASDAQ:WVVI) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Understanding 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. The formula for this calculation on Willamette Valley Vineyards is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.067 = US$4.2m ÷ (US$68m – US$5.0m) (Based on the trailing twelve months to March 2020).
Thus, Willamette Valley Vineyards has an ROCE of 6.7%. In absolute terms, that’s a low return and it also under-performs the Beverage industry average of 15%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Willamette Valley Vineyards’ ROCE against it’s prior returns. If you’d like to look at how Willamette Valley Vineyards has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Willamette Valley Vineyards’ ROCE Trending?
In terms of Willamette Valley Vineyards’ historical ROCE movements, the trend isn’t fantastic. Around five years ago the returns on capital were 11%, but since then they’ve fallen to 6.7%. 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. If these investments prove successful, this can bode very well for long term stock performance.
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Willamette Valley Vineyards. However, despite the promising trends, the stock has fallen 7.3% over the last five years, so there might be an opportunity here for astute investors. As a result, we’d recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you’d like to know more about Willamette Valley Vineyards, we’ve spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.
While Willamette Valley Vineyards isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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.
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