We Like These Underlying Return On Capital Trends At Emperor Watch & Jewellery (HKG:887)

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 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)?

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. Analysts use this formula to calculate it for Emperor Watch & Jewellery:

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

0.084 = HK$424m ÷ (HK$5.5b - HK$445m) (Based on the trailing twelve months to June 2023).

Therefore, Emperor Watch & Jewellery has an ROCE of 8.4%. On its own, that's a low figure but it's around the 9.9% average generated by the Specialty Retail industry.

View our latest analysis for Emperor Watch & Jewellery

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Emperor Watch & Jewellery's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Emperor Watch & Jewellery's ROCE Trend?

Emperor Watch & Jewellery's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 20% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. 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 On Emperor Watch & Jewellery's ROCE

In summary, we're delighted to see that Emperor Watch & Jewellery has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 1 warning sign for Emperor Watch & Jewellery you'll probably want to know about.

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.