There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Treasury Wine Estates (ASX:TWE) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Treasury Wine Estates, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = AU$474m ÷ (AU$6.7b - AU$861m) (Based on the trailing twelve months to December 2021).
So, Treasury Wine Estates has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Beverage industry average of 5.7%.
In the above chart we have measured Treasury Wine Estates' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Treasury Wine Estates.
What Can We Tell From Treasury Wine Estates' ROCE Trend?
The returns on capital haven't changed much for Treasury Wine Estates in recent years. Over the past five years, ROCE has remained relatively flat at around 8.2% and the business has deployed 26% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Treasury Wine Estates' ROCE
As we've seen above, Treasury Wine Estates' returns on capital haven't increased but it is reinvesting in the business. 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 Treasury Wine Estates has the makings of a multi-bagger.
While Treasury Wine Estates doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
While Treasury Wine Estates may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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