If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we’ve noticed some promising trends at Marlborough Wine Estates Group (NZSE:MWE) so let’s look a bit deeper.
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. The formula for this calculation on Marlborough Wine Estates Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0079 = NZ$321k ÷ (NZ$43m – NZ$2.1m) (Based on the trailing twelve months to December 2023).
So, Marlborough Wine Estates Group has an ROCE of 0.8%. Ultimately, that’s a low return and it under-performs the Beverage industry average of 11%.
See our latest analysis for Marlborough Wine Estates Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Marlborough Wine Estates Group’s ROCE against it’s prior returns. If you’re interested in investigating Marlborough Wine Estates Group’s past further, check out this free graph covering Marlborough Wine Estates Group’s past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We’re delighted to see that Marlborough Wine Estates Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it’s earning 0.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Marlborough Wine Estates Group is utilizing 195% more capital than it was five years ago. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
One more thing to note, Marlborough Wine Estates Group has decreased current liabilities to 5.0% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Marlborough Wine Estates Group has grown its returns without a reliance on increasing their current liabilities, which we’re very happy with.
In Conclusion…
To the delight of most shareholders, Marlborough Wine Estates Group has now broken into profitability. Given the stock has declined 36% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
Marlborough Wine Estates Group does have some risks though, and we’ve spotted 1 warning sign for Marlborough Wine Estates Group that you might be interested in.
While Marlborough Wine Estates Group 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. 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.
