To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating China Resources Gas Group (HKG:1193), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. To calculate this metric for China Resources Gas Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = HK$7.9b ÷ (HK$136b - HK$52b) (Based on the trailing twelve months to June 2023).
Therefore, China Resources Gas Group has an ROCE of 9.4%. On its own, that's a low figure but it's around the 8.2% average generated by the Gas Utilities industry.
Check out our latest analysis for China Resources Gas Group
In the above chart we have measured China Resources Gas Group's 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 China Resources Gas Group.
What The Trend Of ROCE Can Tell Us
In terms of China Resources Gas Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.4% from 16% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by China Resources Gas Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 13% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think China Resources Gas Group has the makings of a multi-bagger.
China Resources Gas Group does have some risks though, and we've spotted 1 warning sign for China Resources Gas Group that you might be interested in.
While China Resources Gas Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
