Chow Tai Fook Jewellery Group (HKG:1929) Is Very Good At Capital Allocation

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Chow Tai Fook Jewellery Group (HKG:1929) 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 Chow Tai Fook Jewellery Group is:

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

0.27 = HK$9.6b ÷ (HK$79b - HK$43b) (Based on the trailing twelve months to September 2021).

So, Chow Tai Fook Jewellery Group has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 12%.

Check out our latest analysis for Chow Tai Fook Jewellery Group

In the above chart we have measured Chow Tai Fook Jewellery Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Chow Tai Fook Jewellery Group.

The Trend Of ROCE

Chow Tai Fook Jewellery Group has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 138% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 55% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Chow Tai Fook Jewellery Group's ROCE

As discussed above, Chow Tai Fook Jewellery Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 99% return over the last five years. In light of that, we think it's worth looking further into this stock because if Chow Tai Fook Jewellery Group can keep these trends up, it could have a bright future ahead.

Like most companies, Chow Tai Fook Jewellery Group does come with some risks, and we've found 3 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.