Can The Hong Kong and China Gas Company Limited's (HKG:3) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Hong Kong and China Gas (HKG:3) has had a great run on the share market with its stock up by a significant 7.6% over the last month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Hong Kong and China Gas' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hong Kong and China Gas is:

9.7% = HK$6.7b ÷ HK$69b (Based on the trailing twelve months to June 2025).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.10.

Check out our latest analysis for Hong Kong and China Gas

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Hong Kong and China Gas' Earnings Growth And 9.7% ROE

On the face of it, Hong Kong and China Gas' ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 8.6%, we may spare it some thought. Still, Hong Kong and China Gas has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

We then compared Hong Kong and China Gas' performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 4.6% in the same 5-year period. While this is not particularly good, its not particularly bad either.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 3? You can find out in our latest intrinsic value infographic research report.

Is Hong Kong and China Gas Efficiently Re-investing Its Profits?

Hong Kong and China Gas' very high three-year median payout ratio of 117% suggests that the company is paying its shareholders more than what it is earning. The absence in growth is therefore not surprising. Paying a dividend beyond their means is usually not viable over the long term. That's a huge risk in our books. Our risks dashboard should have the 2 risks we have identified for Hong Kong and China Gas.

In addition, Hong Kong and China Gas has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 100%. Accordingly, forecasts suggest that Hong Kong and China Gas' future ROE will be 11% which is again, similar to the current ROE.

Summary

In total, we would have a hard think before deciding on any investment action concerning Hong Kong and China Gas. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.