Slowing Rates Of Return At Hong Kong and China Gas (HKG:3) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Hong Kong and China Gas (HKG:3), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. To calculate this metric for Hong Kong and China Gas, this is the formula:

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).

So, 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%.

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

So How Is Hong Kong and China Gas' ROCE 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 7.4% and the business has deployed 26% 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

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 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances 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.

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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.