What Do The Returns On Capital At Willamette Valley Vineyards (NASDAQ:WVVI) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Willamette Valley Vineyards (NASDAQ:WVVI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 14%.

View our latest analysis for Willamette Valley Vineyards

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

What Can We Tell From Willamette Valley Vineyards' ROCE Trend?

When we looked at the ROCE trend at Willamette Valley Vineyards, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.8% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Willamette Valley Vineyards' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Willamette Valley Vineyards (including 1 which is significant) .

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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