Returns Are Gaining Momentum At Emperor Watch & Jewellery (HKG:887)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Emperor Watch & Jewellery's (HKG:887) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Emperor Watch & Jewellery is:

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

0.066 = HK$318m ÷ (HK$6.0b - HK$1.1b) (Based on the trailing twelve months to June 2021).

Therefore, Emperor Watch & Jewellery has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.

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.

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

Emperor Watch & Jewellery has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 6.6% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 19% 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.

The Bottom Line

To sum it up, Emperor Watch & Jewellery is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 33% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 2 warning signs facing Emperor Watch & Jewellery that you might find interesting.

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.