Capital allocation trends at Time Watch Investments (HKG: 2033) are not ideal
Did you know that certain financial measures can provide clues about a potential multi-bagger? First, we will want to see a to recover on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. However, after briefly reviewing the numbers, we don’t think Time Watch Investments (HKG: 2033) has the makings of a multi-bagger in the future, but let’s see why this may be the case.
What is Return on Employee Capital (ROCE)?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for Time Watch Investments:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.07 = HK $ 182 million Ã· (HK $ 2.9 billion – HK $ 279 million) (Based on the last twelve months up to December 2020).
Therefore, Time Watch Investments has a ROCE of 7.0%. On its own, this is a low return on capital, but it is in line with industry average returns of 6.7%.
See our latest analysis for Time Watch Investments
Historical performance is a great place to start when looking for a stock. So you can see above the ROCE gauge of Time Watch Investments compared to its past returns. If you want to look at the past performance of Time Watch Investments in other metrics, you can check out this free graph of past income, income and cash flow.
What the ROCE trend can tell us
On the surface, the ROCE trend at Time Watch Investments does not inspire confidence. About five years ago, returns on capital were 25%, but since then they have fallen to 7.0%. And given that incomes have fallen while employing more capital, we would be cautious. If this were to continue, you might consider a business that is trying to reinvest for growth, but is actually losing market share since sales haven’t increased.
Our take on the ROCE of investments
In summary, we are somewhat concerned about the diminishing returns of Time Watch Investments on increasing amounts of capital. Investors should expect better things on the horizon, as the stock has risen 1.7% in the past five years. Either way, we’re not big fans of current trends, so we think you might find better investments elsewhere.
If you want to continue your research on Time Watch Investments, you might be interested in knowing the 1 warning sign that our analysis found.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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