Towngas Smart Energy (HKG:1083) Will Be Hoping To Turn Its Returns On Capital Around

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Towngas Smart Energy (HKG:1083) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.053 = HK$1.8b ÷ (HK$54b - HK$20b) (Based on the trailing twelve months to June 2024).

Therefore, Towngas Smart Energy has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 8.6%.

View 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're interested, you can view the analysts predictions in 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. To be more specific, ROCE has fallen from 6.7% over the last five years. However it looks like Towngas Smart Energy might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Towngas Smart Energy is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 33% in the last five years. Therefore based on the analysis done in this article, we don't think Towngas Smart Energy has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Towngas Smart Energy (1 can't be ignored) you should be aware of.

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.