China Tian Lun Gas Holdings (HKG:1600) Might Have The Makings Of A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in China Tian Lun Gas Holdings' (HKG:1600) returns on capital, so let's have a look.

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. The formula for this calculation on China Tian Lun Gas Holdings is:

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

0.18 = CN¥1.5b ÷ (CN¥13b - CN¥4.6b) (Based on the trailing twelve months to December 2020).

Thus, China Tian Lun Gas Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Gas Utilities industry average of 10% it's much better.

View our latest analysis for China Tian Lun Gas Holdings

Above you can see how the current ROCE for China Tian Lun Gas Holdings 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 China Tian Lun Gas Holdings here for free.

The Trend Of ROCE

We like the trends that we're seeing from China Tian Lun Gas Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. The amount of capital employed has increased too, by 63%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 35% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

All in all, it's terrific to see that China Tian Lun Gas Holdings is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 57% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

China Tian Lun Gas Holdings does have some risks though, and we've spotted 2 warning signs for China Tian Lun Gas Holdings that you might be interested in.

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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