Hong Kong and China Gas (HKG:3) Has More To Do To Multiply In Value Going Forward

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Hong Kong and China Gas (HKG:3), it didn't seem to tick all of these boxes.

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

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 Hong Kong and China Gas:

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

0.074 = HK$9.1b ÷ (HK$160b - HK$37b) (Based on the trailing twelve months to June 2021).

Therefore, Hong Kong and China Gas has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Gas Utilities industry average of 8.9%.

See our latest analysis for Hong Kong and China Gas

Above you can see how the current ROCE for Hong Kong and China Gas 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 Hong Kong and China Gas here for free.

What Does the ROCE Trend For Hong Kong and China Gas Tell Us?

The returns on capital haven't changed much for Hong Kong and China Gas in recent years. The company has employed 26% more capital in the last five years, and the returns on that capital have remained stable at 7.4%. 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.

Our Take On Hong Kong and China Gas' ROCE

Long story short, while Hong Kong and China Gas has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 33% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Hong Kong and China Gas, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Hong Kong and China Gas 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.

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.

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