Returns On Capital At Hong Kong and China Gas (HKG:3) Have Stalled

If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Hong Kong and China Gas (HKG:3), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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$8.4b ÷ (HK$150b - HK$30b) (Based on the trailing twelve months to December 2020).

Thus, 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 10%.

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 to see what analysts are forecasting going forward, you should check out our free report for Hong Kong and China Gas.

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

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 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.

Our Take On Hong Kong and China Gas' ROCE

In conclusion, Hong Kong and China Gas has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 52% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Hong Kong and China Gas does come with some risks, and we've found 2 warning signs that you should be aware of.

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. 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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