Time Watch Investments (HKG:2033) Is Reinvesting At Lower Rates Of Return

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Time Watch Investments (HKG:2033), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Time Watch Investments, this is the formula:

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).

Thus, Time Watch Investments has an ROCE of 7.0%. Even though it's in line with the industry average of 7.4%, it's still a low return by itself.

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 Can We Tell From Time Watch Investments' ROCE Trend?

When we looked at the ROCE trend at Time Watch Investments, we didn't gain much 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. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by Time Watch Investments' diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Time Watch Investments does come with some risks, and we've found 1 warning sign that you should be aware of.

While Time Watch Investments isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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