Tse Sui Luen Jewellery (International) Limited (HKG:417) Is Employing Capital Very Effectively

Simply Wall St

Today we'll look at Tse Sui Luen Jewellery (International) Limited (HKG:417) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Tse Sui Luen Jewellery (International):

0.14 = HK$153m ÷ (HK$2.5b - HK$1.3b) (Based on the trailing twelve months to March 2019.)

So, Tse Sui Luen Jewellery (International) has an ROCE of 14%.

View our latest analysis for Tse Sui Luen Jewellery (International)

Is Tse Sui Luen Jewellery (International)'s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that Tse Sui Luen Jewellery (International)'s ROCE is meaningfully better than the 9.5% average in the Luxury industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Tse Sui Luen Jewellery (International) sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Our data shows that Tse Sui Luen Jewellery (International) currently has an ROCE of 14%, compared to its ROCE of 7.5% 3 years ago. This makes us think the business might be improving. The image below shows how Tse Sui Luen Jewellery (International)'s ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:417 Past Revenue and Net Income, September 11th 2019
SEHK:417 Past Revenue and Net Income, September 11th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. How cyclical is Tse Sui Luen Jewellery (International)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Tse Sui Luen Jewellery (International)'s Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Tse Sui Luen Jewellery (International) has total assets of HK$2.5b and current liabilities of HK$1.3b. Therefore its current liabilities are equivalent to approximately 55% of its total assets. Tse Sui Luen Jewellery (International) has a relatively high level of current liabilities, boosting its ROCE meaningfully.

What We Can Learn From Tse Sui Luen Jewellery (International)'s ROCE

The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than Tse Sui Luen Jewellery (International) out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.