Under The Bonnet, Chow Tai Fook Jewellery Group's (HKG:1929) Returns Look Impressive

What trends should we look for it we want to identify stocks that can 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. 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.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chow Tai Fook Jewellery Group:

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

0.22 = HK$8.3b ÷ (HK$88b - HK$50b) (Based on the trailing twelve months to March 2022).

So, Chow Tai Fook Jewellery Group has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 11%.

Our analysis indicates that 1929 is potentially overvalued!

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 here for free.

What Does the ROCE Trend For Chow Tai Fook Jewellery Group Tell Us?

Chow Tai Fook Jewellery Group is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 57% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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 57% 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

To bring it all together, Chow Tai Fook Jewellery Group has done well to increase the returns it's generating from its capital employed. And a remarkable 136% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

Chow Tai Fook Jewellery Group does have some risks though, and we've spotted 1 warning sign for Chow Tai Fook Jewellery Group that you might be interested in.

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.