Some Investors May Be Worried About Towngas Smart Energy's (HKG:1083) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Towngas Smart Energy (HKG:1083) and its ROCE trend, we weren't exactly thrilled.

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What Is Return On Capital Employed (ROCE)?

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. 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)

0.045 = HK$1.8b ÷ (HK$55b - HK$16b) (Based on the trailing twelve months to June 2025).

Therefore, Towngas Smart Energy has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 7.3%.

See our latest analysis for Towngas Smart Energy

In the above chart we have measured Towngas Smart Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Towngas Smart Energy .

What Does the ROCE Trend For Towngas Smart Energy Tell Us?

On the surface, the trend of ROCE at Towngas Smart Energy doesn't inspire confidence. Around five years ago the returns on capital were 5.9%, but since then they've fallen to 4.5%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Towngas Smart Energy's ROCE

Bringing it all together, while we're somewhat encouraged by Towngas Smart Energy's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 36% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Towngas Smart Energy does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While Towngas Smart Energy 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.