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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Duckhorn Portfolio's (NYSE:NAPA) returns on capital, so let's have a look.
What Is 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. The formula for this calculation on Duckhorn Portfolio is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = US$106m ÷ (US$1.3b - US$74m) (Based on the trailing twelve months to July 2023).
Therefore, Duckhorn Portfolio has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 16%.
View our latest analysis for Duckhorn Portfolio
Above you can see how the current ROCE for Duckhorn Portfolio compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Duckhorn Portfolio here for free.
How Are Returns Trending?
Duckhorn Portfolio has not disappointed with their ROCE growth. The figures show that over the last four years, ROCE has grown 43% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Duckhorn Portfolio's ROCE
To bring it all together, Duckhorn Portfolio has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 19% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
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.