Australian Vintage (ASX: AVG) returns are on the rise

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked Australian vintage (ASX: AVG) 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 Australian Vintage is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.068 = A $ 28 million ÷ (A $ 470 million – A $ 52 million) (Based on the last twelve months up to December 2020).

Therefore, Australian Vintage has a ROCE of 6.8%. On its own, that’s a low return, but compared to the 5.2% average generated by the beverage industry, it’s much better.

Check out our latest review for Australian Vintage

ASX: AVG Return on capital employed on July 18, 2021

Above you can see how Australian Vintage’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you like, you can check out analyst forecasts covering Australian Vintage here for free.

So what’s the Australian Vintage ROCE trend?

Australian Vintage is promising as its ROCE is tilted up and to the right. Specifically, while the company has kept capital employed relatively stable over the past five years, ROCE has climbed 88% over the same period. Basically, the business generates higher returns from the same amount of capital, which proves that there are improvements in the efficiency of the business. It’s worth digging deeper into, because while it is good that the company is more efficient, it could also mean that in the future the areas in which to invest internally for organic growth are lacking.

Our opinion on Australian Vintage ROCE

To sum up, Australian Vintage collects higher returns for the same amount of capital, and that’s impressive. And investors seem to expect more of that in the future, as the stock has rewarded shareholders with a 70% return over the past five years. Therefore, we believe it would be worth checking whether these trends will continue.

If you want to continue your research on Australian Vintage, you might be interested in the 1 warning sign that our analysis found.

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. It does not constitute a recommendation to buy or sell shares 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 the mentioned stocks.
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