Returns At Hong Kong and China Gas (HKG:3) Appear To Be Weighed Down

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Hong Kong and China Gas (HKG:3) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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)

0.066 = HK$8.5b ÷ (HK$165b - HK$35b) (Based on the trailing twelve months to June 2022).

So, Hong Kong and China Gas has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 8.8%.

View our latest analysis for Hong Kong and China Gas

In the above chart we have measured Hong Kong and China Gas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hong Kong and China Gas.

How Are Returns Trending?

The returns on capital haven't changed much for Hong Kong and China Gas in recent years. Over the past five years, ROCE has remained relatively flat at around 6.6% and the business has deployed 30% 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

In summary, Hong Kong and China Gas has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 36% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Hong Kong and China Gas (including 2 which are a bit concerning) .

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.

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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.