China Gas Holdings (HKG:384) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think China Gas Holdings (HKG:384) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Gas Holdings, this is the formula:

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

0.056 = HK$5.9b ÷ (HK$157b - HK$52b) (Based on the trailing twelve months to March 2023).

Therefore, 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 8.2%.

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

SWOT Analysis for China Gas Holdings

What Can We Tell From China Gas Holdings' ROCE Trend?

On the surface, the trend of ROCE at China Gas Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 14% five years ago. However it looks like China Gas Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On China Gas Holdings' ROCE

To conclude, we've found that China Gas Holdings is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 66% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think China Gas Holdings has the makings of a multi-bagger.

On a final note, we found 3 warning signs for China Gas Holdings (1 is significant) you should be aware of.

While China Gas Holdings 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.