Returns On Capital Are Showing Encouraging Signs At Yuan Heng Gas Holdings (HKG:332)

If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Yuan Heng Gas Holdings (HKG:332) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Yuan Heng Gas Holdings:

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

0.018 = CN¥30m ÷ (CN¥3.7b - CN¥2.0b) (Based on the trailing twelve months to September 2020).

Thus, Yuan Heng Gas Holdings has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.8%.

View our latest analysis for Yuan Heng Gas Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yuan Heng Gas Holdings' ROCE against it's prior returns. If you'd like to look at how Yuan Heng Gas Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Yuan Heng Gas Holdings is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.8% on its capital. In addition to that, Yuan Heng Gas Holdings is employing 107% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 55%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Yuan Heng Gas Holdings' ROCE

Long story short, we're delighted to see that Yuan Heng Gas Holdings' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 52% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Yuan Heng Gas Holdings does have some risks, we noticed 3 warning signs (and 2 which shouldn't be ignored) we think you should 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. 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.
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