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Willamette Valley Vineyards (NASDAQ:WVVI) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 Willamette Valley Vineyards (NASDAQ:WVVI), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Willamette Valley Vineyards, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.026 = US$2.3m ÷ (US$94m - US$6.7m) (Based on the trailing twelve months to June 2022).

So, Willamette Valley Vineyards has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Beverage industry average of 14%.

Check out our latest analysis for Willamette Valley Vineyards

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While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Willamette Valley Vineyards' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Willamette Valley Vineyards Tell Us?

When we looked at the ROCE trend at Willamette Valley Vineyards, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.1% over the last five years. However it looks like Willamette Valley Vineyards might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Willamette Valley Vineyards' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Willamette Valley Vineyards does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Willamette Valley Vineyards may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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