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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)
0.05 = HK$4.9b ÷ (HK$149b - HK$52b) (Based on the trailing twelve months to September 2023).
Thus, China Gas Holdings has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 8.4%.
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'd like, you can check out the forecasts from the analysts covering China Gas Holdings for free.
So How Is China Gas Holdings' ROCE Trending?
In terms of China Gas Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.0% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
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 59% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One more thing: We've identified 3 warning signs with China Gas Holdings (at least 1 which shouldn't be ignored) , and understanding these 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.