We're Watching These Trends At Willamette Valley Vineyards (NASDAQ:WVVI)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Willamette Valley Vineyards (NASDAQ:WVVI), it didn't seem to tick all of these boxes.

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 Willamette Valley Vineyards, this is the formula:

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

0.072 = US$4.6m ÷ (US$75m - US$11m) (Based on the trailing twelve months to September 2020).

Therefore, Willamette Valley Vineyards has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Beverage industry average of 13%.

View our latest analysis for Willamette Valley Vineyards

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 want to delve into the historical earnings, revenue and cash flow of Willamette Valley Vineyards, check out these free graphs here.

So How Is Willamette Valley Vineyards' ROCE Trending?

On the surface, the trend of ROCE at Willamette Valley Vineyards doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.2% from 9.8% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Willamette Valley Vineyards' ROCE

To conclude, we've found that Willamette Valley Vineyards is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Willamette Valley Vineyards has the makings of a multi-bagger.

Willamette Valley Vineyards does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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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