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China Resources Gas Group (HKG:1193) Has More To Do To Multiply In Value Going Forward
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So, when we ran our eye over China Resources Gas Group's (HKG:1193) trend of ROCE, we liked what we saw.
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. Analysts use this formula to calculate it for China Resources Gas Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = HK$7.2b ÷ (HK$94b - HK$39b) (Based on the trailing twelve months to December 2020).
Therefore, China Resources Gas Group has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Gas Utilities industry.
Check out our latest analysis for China Resources Gas Group
Above you can see how the current ROCE for China Resources Gas Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Resources Gas Group.
So How Is China Resources Gas Group's ROCE Trending?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 59% more capital into its operations. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, China Resources Gas Group's current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In the end, China Resources Gas Group has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 126% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
While China Resources Gas Group doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
While China Resources Gas Group 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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About SEHK:1193
China Resources Gas Group
An investment holding company, engages in the sale of natural and liquefied gas, and connection of gas pipelines.
Adequate balance sheet average dividend payer.