Our Take On The Returns On Capital At Hong Kong and China Gas (HKG:3)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. The formula for this calculation on Hong Kong and China Gas is:

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

0.07 = HK$7.9b ÷ (HK$139b - HK$26b) (Based on the trailing twelve months to June 2020).

Therefore, Hong Kong and China Gas has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 11%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Hong Kong and China Gas' ROCE Trend?

There are better returns on capital out there than what we're seeing at Hong Kong and China Gas. Over the past five years, ROCE has remained relatively flat at around 7.0% and the business has deployed 21% more capital into its operations. 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 Bottom Line On Hong Kong and China Gas' ROCE

As we've seen above, Hong Kong and China Gas' returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 38% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Hong Kong and China Gas, we've discovered 2 warning signs that you should be aware of.

While Hong Kong and China Gas 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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