Investors Could Be Concerned With Chengdu Gas Group's (SHSE:603053) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Chengdu Gas Group (SHSE:603053) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Chengdu Gas Group is:

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

0.089 = CN¥457m ÷ (CN¥8.1b - CN¥2.9b) (Based on the trailing twelve months to March 2024).

Therefore, Chengdu Gas Group has an ROCE of 8.9%. Even though it's in line with the industry average of 9.0%, it's still a low return by itself.

See our latest analysis for Chengdu Gas Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chengdu Gas Group's ROCE against it's prior returns. If you're interested in investigating Chengdu Gas Group's past further, check out this free graph covering Chengdu Gas Group's past earnings, revenue and cash flow.

So How Is Chengdu Gas Group's ROCE Trending?

On the surface, the trend of ROCE at Chengdu Gas Group doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 8.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Chengdu Gas Group has done well to pay down its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Chengdu Gas Group's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 5.8% over the last three years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Chengdu Gas Group, we've discovered 1 warning sign that you should be aware of.

While Chengdu Gas Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.