Returns On Capital - An Important Metric For Hsin Tai Gas (GTSM:8917)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Hsin Tai Gas (GTSM:8917) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hsin Tai Gas, this is the formula:

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

0.14 = NT$515m ÷ (NT$4.7b - NT$1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Hsin Tai Gas has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Gas Utilities industry.

See our latest analysis for Hsin Tai Gas

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Hsin Tai Gas has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Hsin Tai Gas are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 61% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Hsin Tai Gas' ROCE

All in all, it's terrific to see that Hsin Tai Gas is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 68% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Hsin Tai Gas does have some risks though, and we've spotted 1 warning sign for Hsin Tai Gas that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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