Returns On Capital - An Important Metric For Oriental Watch Holdings (HKG:398)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Oriental Watch Holdings (HKG:398) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Oriental Watch Holdings, this is the formula:

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

0.077 = HK$186m ÷ (HK$2.8b - HK$329m) (Based on the trailing twelve months to September 2020).

So, Oriental Watch Holdings has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 11%.

See our latest analysis for Oriental Watch Holdings

In the above chart we have measured Oriental Watch Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Oriental Watch Holdings here for free.

How Are Returns Trending?

We're delighted to see that Oriental Watch Holdings is reaping rewards from its investments and has now broken into profitability. The company now earns 7.7% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

In Conclusion...

To bring it all together, Oriental Watch Holdings has done well to increase the returns it's generating from its capital employed. And a remarkable 350% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 2 warning signs for Oriental Watch Holdings you'll probably want to know about.

While Oriental Watch Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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