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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.