Emperor Watch & Jewellery (HKG:887) Might Have The Makings Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Emperor Watch & Jewellery (HKG:887) and its trend of ROCE, we really liked what we saw.

What is 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. To calculate this metric for Emperor Watch & Jewellery, this is the formula:

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

0.015 = HK$74m ÷ (HK$5.8b - HK$1.0b) (Based on the trailing twelve months to December 2020).

So, Emperor Watch & Jewellery has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 11%.

See our latest analysis for Emperor Watch & Jewellery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Emperor Watch & Jewellery's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Emperor Watch & Jewellery, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Emperor Watch & Jewellery has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 1.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Emperor Watch & Jewellery has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

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. Essentially the business now has suppliers or short-term creditors funding about 18% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

As discussed above, Emperor Watch & Jewellery appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 0.2% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 3 warning signs with Emperor Watch & Jewellery and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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