Here's What To Make Of Tian Lun Gas Holdings' (HKG:1600) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Tian Lun Gas Holdings (HKG:1600), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for Tian Lun Gas Holdings, this is the formula:

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

0.096 = CN¥1.0b ÷ (CN¥16b - CN¥5.1b) (Based on the trailing twelve months to December 2022).

Therefore, Tian Lun Gas Holdings has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 7.3% generated by the Gas Utilities industry, it's much better.

View our latest analysis for Tian Lun Gas Holdings

Above you can see how the current ROCE for 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 to see what analysts are forecasting going forward, you should check out our free report for Tian Lun Gas Holdings.

The Trend Of ROCE

The returns on capital haven't changed much for Tian Lun Gas Holdings in recent years. The company has employed 65% more capital in the last five years, and the returns on that capital have remained stable at 9.6%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

As we've seen above, Tian Lun Gas Holdings' returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Tian Lun Gas Holdings has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Tian Lun Gas Holdings (of which 1 is a bit unpleasant!) that you should know about.

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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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.