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To find multi-bagger stock, what are the underlying trends we need to look for in a business? Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits into the business and generating higher returns. So when we looked Dynasty Fine Wines Group (HKG: 828) and its trend of ROCE, we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Dynasty Fine Wines Group is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.028 = HK $ 6.8million ÷ (HK $ 596million – HK $ 357million) (Based on the last twelve months up to June 2021).
So, The Dynasty Fine Wines group posted a ROCE of 2.8%. In absolute terms, that’s a low yield and it’s also below the beverage industry average of 11%.
Check out our latest analysis for Dynasty Fine Wines Group
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you would like to see how Dynasty Fine Wines Group has performed in the past in other measures, you can see this free graph of past income, income and cash flow.
What can we say about the ROCE trend of Dynasty Fine Wines Group?
It’s great to see that Dynasty Fine Wines Group has started to generate pre-tax profits from past investments. The company was posting losses five years ago, but now it has recovered, gaining 2.8%, which is no doubt a relief for some of the early shareholders. At first glance, it seems that the company is increasingly skilled at generating returns, as over the same period the amount of capital employed has decreased by 46%. Dynasty Fine Wines Group could sell underperforming assets as ROCE improves.
Another thing to note, Dynasty Fine Wines Group has a high ratio of current liabilities to total assets of 60%. This can lead to some risks as the business is basically operating with quite a lot of dependence on its suppliers or other types of short term creditors. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.
Our opinion on the ROCE of Dynasty Fine Wines Group
From what we have seen above, Dynasty Fine Wines Group has been successful in increasing its returns on capital while reducing its capital base. Since the stock has only returned 6.5% to shareholders in the past year, promising fundamentals may not yet be recognized by investors. Therefore, further exploring this stock might reveal a good opportunity, if valuation and other metrics stack up.
Like most businesses, Dynasty Fine Wines Group carries certain risks, and we have found 2 warning signs that you need to be aware of.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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