We Like These Underlying Trends At China Tian Lun Gas Holdings (HKG:1600)

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. So when we looked at China Tian Lun Gas Holdings (HKG:1600) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for China Tian Lun Gas Holdings, this is the formula:

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

0.17 = CN¥1.5b ÷ (CN¥13b - CN¥4.1b) (Based on the trailing twelve months to June 2020).

Thus, China Tian Lun Gas Holdings has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Gas Utilities industry average of 11% it's much better.

Check out 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.

What Can We Tell From China Tian Lun Gas Holdings' ROCE Trend?

The trends we've noticed at China Tian Lun Gas Holdings are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 104% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

To sum it up, China Tian Lun Gas Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 28% to shareholders. So with that in mind, we think the stock deserves further research.

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.

While China Tian Lun Gas Holdings 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. 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.
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