Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Foley Wines (NZSE:FWL), we don’t think it’s current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.043 = NZ$9.8m ÷ (NZ$246m – NZ$18m) (Based on the trailing twelve months to December 2023).
Thus, Foley Wines has an ROCE of 4.3%. In absolute terms, that’s a low return and it also under-performs the Beverage industry average of 11%.
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.
How Are Returns Trending?
There are better returns on capital out there than what we’re seeing at Foley Wines. The company has consistently earned 4.3% for the last five years, and the capital employed within the business has risen 70% in that time. 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
Long story short, while Foley Wines has been reinvesting its capital, the returns that it’s generating haven’t increased. And in the last five years, the stock has given away 53% so the market doesn’t look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.
If you want to know some of the risks facing Foley Wines we’ve found 4 warning signs (1 shouldn’t be ignored!) that you should be aware of before investing here.
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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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
