Here's What's Concerning About New World Department Store China's (HKG:825) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think New World Department Store China (HKG:825) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 New World Department Store China is:

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

0.03 = HK$282m ÷ (HK$14b - HK$4.5b) (Based on the trailing twelve months to December 2021).

Thus, New World Department Store China has an ROCE of 3.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.0%.

View our latest analysis for New World Department Store China

Historical performance is a great place to start when researching a stock so above you can see the gauge for New World Department Store China's ROCE against it's prior returns. If you're interested in investigating New World Department Store China's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at New World Department Store China, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.3% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that New World Department Store China is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 17% in the last five years. Therefore based on the analysis done in this article, we don't think New World Department Store China has the makings of a multi-bagger.

If you'd like to know about the risks facing New World Department Store China, we've discovered 2 warning signs that you should be aware of.

While New World Department Store China 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.