Capital Allocation Trends At China Gas Holdings (HKG:384) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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 China Gas Holdings (HKG:384), it didn't seem to tick all of these boxes.

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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. The formula for this calculation on China Gas Holdings is:

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

0.056 = HK$5.7b ÷ (HK$148b - HK$47b) (Based on the trailing twelve months to March 2025).

Thus, China Gas Holdings has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 7.1%.

See our latest analysis for China Gas Holdings

Above you can see how the current ROCE for China Gas Holdings 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 analyst report for China Gas Holdings .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at China Gas Holdings doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 5.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, China Gas Holdings has decreased its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by China Gas Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 52% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 2 warning signs with China Gas Holdings (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While China Gas Holdings 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.