Returns Are Gaining Momentum At Tsui Wah Holdings (HKG:1314)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Tsui Wah Holdings (HKG:1314) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Tsui Wah Holdings is:

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

0.034 = HK$22m ÷ (HK$916m - HK$281m) (Based on the trailing twelve months to September 2023).

So, Tsui Wah Holdings has an ROCE of 3.4%. In absolute terms, that's a low return but it's around the Hospitality industry average of 3.8%.

See our latest analysis for Tsui Wah Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tsui Wah Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tsui Wah Holdings, check out these free graphs here.

The Trend Of ROCE

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. The data shows that returns on capital have increased by 91% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 45% less capital than it was five years ago. Tsui Wah Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 31% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

In a nutshell, we're pleased to see that Tsui Wah Holdings has been able to generate higher returns from less capital. However the stock is down a substantial 76% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Like most companies, Tsui Wah Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

While Tsui Wah Holdings 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. 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.