Tse Sui Luen Jewellery (International)'s (HKG:417) Returns On Capital Not Reflecting Well On The Business

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Tse Sui Luen Jewellery (International) (HKG:417), we weren't too upbeat about how things were going.

Understanding 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. 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)

0.017 = HK$24m ÷ (HK$2.7b - HK$1.3b) (Based on the trailing twelve months to September 2021).

Therefore, Tse Sui Luen Jewellery (International) has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.0%.

See 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.

How Are Returns Trending?

In terms of Tse Sui Luen Jewellery (International)'s historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Tse Sui Luen Jewellery (International) to turn into a multi-bagger.

On a separate but related note, it's important to know that Tse Sui Luen Jewellery (International) has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. 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.

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

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 52% over the last five years, so it looks like investors are recognizing these changes. 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 (1 can't be ignored!) 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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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.