How Has Tse Sui Luen Jewellery (International) (HKG:417) Allocated Its Capital?

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Tse Sui Luen Jewellery (International) (HKG:417), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Tse Sui Luen Jewellery (International) is:

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

0.004 = HK$6.4m ÷ (HK$2.7b - HK$1.1b) (Based on the trailing twelve months to March 2020).

Thus, Tse Sui Luen Jewellery (International) has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.3%.

See our latest analysis for Tse Sui Luen Jewellery (International)

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 want to delve into the historical earnings, revenue and cash flow of Tse Sui Luen Jewellery (International), check out these free graphs here.

What Does the ROCE Trend For Tse Sui Luen Jewellery (International) Tell Us?

There is reason to be cautious about Tse Sui Luen Jewellery (International), given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.3% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tse Sui Luen Jewellery (International) becoming one if things continue as they have.

Another thing to note, Tse Sui Luen Jewellery (International) has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Tse Sui Luen Jewellery (International)'s ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Tse Sui Luen Jewellery (International) we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

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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