The Returns On Capital At Tse Sui Luen Jewellery (International) (HKG:417) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Tse Sui Luen Jewellery (International) (HKG:417) we aren't filled with optimism, but let's investigate further.

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 Tse Sui Luen Jewellery (International):

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

0.035 = HK$49m ÷ (HK$2.5b - HK$1.1b) (Based on the trailing twelve months to March 2021).

So, Tse Sui Luen Jewellery (International) has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.9%.

Check out our latest analysis for Tse Sui Luen Jewellery (International)

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

The Trend Of ROCE

There is reason to be cautious about Tse Sui Luen Jewellery (International), given the returns are trending downwards. About five years ago, returns on capital were 7.5%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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 44%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Tse Sui Luen Jewellery (International)'s ROCE

In summary, it's unfortunate that Tse Sui Luen Jewellery (International) is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Tse Sui Luen Jewellery (International), we've spotted 5 warning signs, and 1 of them shouldn't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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