Emperor Watch & Jewellery's (HKG:887) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So on that note, Emperor Watch & Jewellery (HKG:887) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.06 = HK$296m ÷ (HK$5.4b - HK$433m) (Based on the trailing twelve months to December 2022).

Therefore, Emperor Watch & Jewellery has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 8.2%.

Check out 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.

So How Is Emperor Watch & Jewellery's ROCE Trending?

Emperor Watch & Jewellery is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 57% in that same time. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

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. And since the stock has fallen 60% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 2 warning signs with Emperor Watch & Jewellery (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.