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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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Virgin Wines UK (LON:VINO), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Virgin Wines UK, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = UK£1.2m ÷ (UK£41m - UK£15m) (Based on the trailing twelve months to June 2024).
So, Virgin Wines UK has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 13%.
View our latest analysis for Virgin Wines UK
In the above chart we have measured Virgin Wines UK's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Virgin Wines UK .
What Does the ROCE Trend For Virgin Wines UK Tell Us?
In terms of Virgin Wines UK's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.8% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
In summary, Virgin Wines UK is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 81% in the last three years. 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.
One more thing: We've identified 2 warning signs with Virgin Wines UK (at least 1 which is concerning) , and understanding these would certainly be useful.