Yahoo Finance Here's What To Make Of PETRONAS Gas Berhad's (KLSE:PETGAS) Decelerating Rates Of Return
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at PETRONAS Gas Berhad (KLSE:PETGAS), it didn't seem to tick all of these boxes.
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 PETRONAS Gas Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = RM2.3b ÷ (RM19b - RM2.2b) (Based on the trailing twelve months to September 2023).
Therefore, PETRONAS Gas Berhad has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Gas Utilities industry.
View our latest analysis for PETRONAS Gas Berhad
Above you can see how the current ROCE for PETRONAS Gas Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering PETRONAS Gas Berhad here for free.
What The Trend Of ROCE Can Tell Us
Over the past five years, PETRONAS Gas Berhad's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if PETRONAS Gas Berhad doesn't end up being a multi-bagger in a few years time. That probably explains why PETRONAS Gas Berhad has been paying out 82% of its earnings as dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.
Our Take On PETRONAS Gas Berhad's ROCE
In a nutshell, PETRONAS Gas Berhad has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 28% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to continue researching PETRONAS Gas Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.
While PETRONAS Gas Berhad 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.
