The Return Trends At Petra Energy Berhad (KLSE:PENERGY) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Petra Energy Berhad (KLSE:PENERGY) looks quite promising in regards to its trends of return on capital.

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 Petra Energy Berhad, this is the formula:

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

0.054 = RM22m ÷ (RM593m - RM194m) (Based on the trailing twelve months to December 2020).

Therefore, Petra Energy Berhad has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 7.8%.

View our latest analysis for Petra Energy Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Petra Energy Berhad's ROCE against it's prior returns. If you'd like to look at how Petra Energy Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Petra Energy Berhad. We found that the returns on capital employed over the last five years have risen by 860%. The company is now earning RM0.05 per dollar of capital employed. In regards to capital employed, Petra Energy Berhad appears to been achieving more with less, since the business is using 41% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Our Take On Petra Energy Berhad's ROCE

In the end, Petra Energy Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 3 warning signs facing Petra Energy Berhad that you might find interesting.

While Petra Energy 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. 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.
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