Shareholders Would Enjoy A Repeat Of Chow Tai Fook Jewellery Group's (HKG:1929) Recent Growth In Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Chow Tai Fook Jewellery Group's (HKG:1929) returns on capital, so let's have a look.

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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. To calculate this metric for Chow Tai Fook Jewellery Group, this is the formula:

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

0.32 = HK$9.2b ÷ (HK$87b - HK$58b) (Based on the trailing twelve months to September 2024).

Therefore, Chow Tai Fook Jewellery Group has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 8.9% earned by companies in a similar industry.

See our latest analysis for Chow Tai Fook Jewellery Group

Above you can see how the current ROCE for Chow Tai Fook Jewellery Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Chow Tai Fook Jewellery Group for free.

So How Is Chow Tai Fook Jewellery Group's ROCE Trending?

Chow Tai Fook Jewellery Group's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 59% over the last five years. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 67% of its operations, which isn't ideal. 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

To sum it up, Chow Tai Fook Jewellery Group is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 149% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

If you'd like to know about the risks facing Chow Tai Fook Jewellery Group, we've discovered 3 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.