Hokkaido Gas (TSE:9534) Might Have The Makings Of A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Hokkaido Gas' (TSE:9534) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Hokkaido Gas is:

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

0.11 = JP¥16b ÷ (JP¥179b - JP¥36b) (Based on the trailing twelve months to December 2023).

Thus, Hokkaido Gas has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Gas Utilities industry.

See our latest analysis for Hokkaido Gas

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hokkaido Gas' ROCE against it's prior returns. If you're interested in investigating Hokkaido Gas' past further, check out this free graph covering Hokkaido Gas' past earnings, revenue and cash flow.

How Are Returns Trending?

We like the trends that we're seeing from Hokkaido Gas. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 21%. So we're very much inspired by what we're seeing at Hokkaido Gas thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hokkaido Gas has. Since the stock has returned a staggering 140% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Hokkaido Gas can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Hokkaido Gas and understanding this should be part of your investment process.

While Hokkaido 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.