Capital Allocation Trends At Time Watch Investments (HKG:2033) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Time Watch Investments (HKG:2033) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Time Watch Investments:

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

0.07 = HK$182m ÷ (HK$2.9b - HK$279m) (Based on the trailing twelve months to December 2020).

Therefore, Time Watch Investments has an ROCE of 7.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.

See our latest analysis for Time Watch Investments

Historical performance is a great place to start when researching a stock so above you can see the gauge for Time Watch Investments' ROCE against it's prior returns. If you'd like to look at how Time Watch Investments has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Time Watch Investments doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 7.0%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Time Watch Investments' ROCE

In summary, we're somewhat concerned by Time Watch Investments' diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 1.7% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to continue researching Time Watch Investments, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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