Returns On Capital At PETRONAS Dagangan Berhad (KLSE:PETDAG) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at PETRONAS Dagangan Berhad (KLSE:PETDAG), it does have a high ROCE right now, but lets see how returns are trending.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for PETRONAS Dagangan Berhad:

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

0.23 = RM1.4b ÷ (RM11b - RM4.9b) (Based on the trailing twelve months to March 2023).

So, PETRONAS Dagangan Berhad has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Check out our latest analysis for PETRONAS Dagangan Berhad

Above you can see how the current ROCE for PETRONAS Dagangan 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 Dagangan Berhad here for free.

What Does the ROCE Trend For PETRONAS Dagangan Berhad Tell Us?

Over the past five years, PETRONAS Dagangan Berhad's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward. That probably explains why PETRONAS Dagangan Berhad has been paying out 88% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 45% of total assets, this reported ROCE would probably be less than23% because total capital employed would be higher.The 23% ROCE could be even lower if current liabilities weren't 45% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Key Takeaway

In summary, PETRONAS Dagangan Berhad isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think PETRONAS Dagangan Berhad has the makings of a multi-bagger.

If you want to continue researching PETRONAS Dagangan Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.