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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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.

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)

0.067 = HK$8.4b ÷ (HK$168b - HK$44b) (Based on the trailing twelve months to December 2022).

Therefore, Hong Kong and China Gas has an ROCE of 6.7%. Even though it's in line with the industry average of 7.3%, it's still a low return by itself.

Check out 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.

The Trend Of ROCE

In terms of Hong Kong and China Gas' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.7% for the last five years, and the capital employed within the business has risen 26% in that time. 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

In conclusion, Hong Kong and China Gas has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Hong Kong and China Gas and understanding these should be part of your investment process.

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. 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.