Here's What To Make Of Towngas Smart Energy's (HKG:1083) Decelerating Rates Of Return

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Towngas Smart Energy (HKG:1083), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Towngas Smart Energy, this is the formula:

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

0.057 = HK$2.1b ÷ (HK$54b - HK$17b) (Based on the trailing twelve months to December 2021).

Therefore, Towngas Smart Energy has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 9.5%.

See our latest analysis for Towngas Smart Energy

Above you can see how the current ROCE for Towngas Smart Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Towngas Smart Energy here for free.

What Can We Tell From Towngas Smart Energy's ROCE Trend?

In terms of Towngas Smart Energy's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 5.7% and the business has deployed 82% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

Long story short, while Towngas Smart Energy has been reinvesting its capital, the returns that it's generating haven't increased. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Towngas Smart Energy we've found 4 warning signs (1 is significant!) that you should be aware of before investing here.

While Towngas Smart Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.