What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Tsui Wah Holdings (HKG:1314) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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 Tsui Wah Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = HK$22m ÷ (HK$890m - HK$242m) (Based on the trailing twelve months to March 2024).
So, Tsui Wah Holdings has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.9%.
View our latest analysis for Tsui Wah Holdings
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'd like to look at how Tsui Wah Holdings has performed in the past in other metrics, you can view this free graph of Tsui Wah Holdings' past earnings, revenue and cash flow.
So How Is Tsui Wah Holdings' ROCE Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased by 465% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Tsui Wah Holdings appears to been achieving more with less, since the business is using 44% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
In Conclusion...
In a nutshell, we're pleased to see that Tsui Wah Holdings has been able to generate higher returns from less capital. And since the stock has fallen 30% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Tsui Wah Holdings, you might be interested to know about the 4 warning signs that our analysis has discovered.
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.