China Gas Holdings (HKG:384) Will Want To Turn Around Its Return Trends

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at China Gas Holdings (HKG:384) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 China Gas Holdings, this is the formula:

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

0.082 = HK$8.6b ÷ (HK$157b - HK$52b) (Based on the trailing twelve months to September 2022).

So, China Gas Holdings has an ROCE of 8.2%. Even though it's in line with the industry average of 8.4%, it's still a low return by itself.

See our latest analysis for China Gas Holdings

In the above chart we have measured China Gas Holdings' 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.

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. Around five years ago the returns on capital were 16%, but since then they've fallen to 8.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On China Gas Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for China Gas Holdings. These growth trends haven't led to growth returns though, since the stock has fallen 58% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

China Gas Holdings does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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. 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.