If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at China Gas Industry Investment Holdings' (HKG:1940) ROCE trend, we were pretty happy with what we saw.
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. The formula for this calculation on China Gas Industry Investment Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥192m ÷ (CN¥2.5b - CN¥668m) (Based on the trailing twelve months to December 2023).
Thus, China Gas Industry Investment Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Chemicals industry.
Check out our latest analysis for China Gas Industry Investment Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Gas Industry Investment Holdings' ROCE against it's prior returns. If you'd like to look at how China Gas Industry Investment Holdings has performed in the past in other metrics, you can view this free graph of China Gas Industry Investment Holdings' past earnings, revenue and cash flow.
What Does the ROCE Trend For China Gas Industry Investment Holdings Tell Us?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 41% more capital into its operations. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
In Conclusion...
In the end, China Gas Industry Investment Holdings has proven its ability to adequately reinvest capital at good rates of return. What's surprising though is that the stock has collapsed 87% over the last three years, so there might be other areas of the business hurting its prospects. In any case, we like the underlying trends and would look further into this stock.
One more thing, we've spotted 1 warning sign facing China Gas Industry Investment Holdings that you might find interesting.
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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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.