To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Hong Kong and China Gas (HKG:3), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hong Kong and China Gas:

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

0.07 = HK$8.6b ÷ (HK$162b - HK$38b) (Based on the trailing twelve months to June 2023).

Thus, Hong Kong and China Gas has an ROCE of 7.0%. In absolute terms, that's a low return but it's around the Gas Utilities industry average of 8.2%.

See our latest analysis for Hong Kong and China Gas

In the above chart we have measured Hong Kong and China Gas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hong Kong and China Gas.

What Can We Tell From Hong Kong and China Gas' ROCE Trend?

The returns on capital haven't changed much for Hong Kong and China Gas in recent years. The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 7.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while Hong Kong and China Gas has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 52% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Hong Kong and China Gas that we think you should be aware of.

While Hong Kong and China 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.