Petron Malaysia Refining & Marketing Bhd (KLSE:PETRONM) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can 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. 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 Petron Malaysia Refining & Marketing Bhd (KLSE:PETRONM), it didn't seem to tick all of these boxes.

Understanding 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. The formula for this calculation on Petron Malaysia Refining & Marketing Bhd is:

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

0.17 = RM387m ÷ (RM4.9b - RM2.6b) (Based on the trailing twelve months to March 2022).

Thus, Petron Malaysia Refining & Marketing Bhd has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 9.1% it's much better.

Check out our latest analysis for Petron Malaysia Refining & Marketing Bhd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Petron Malaysia Refining & Marketing Bhd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Petron Malaysia Refining & Marketing Bhd, check out these free graphs here.

So How Is Petron Malaysia Refining & Marketing Bhd's ROCE Trending?

When we looked at the ROCE trend at Petron Malaysia Refining & Marketing Bhd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 17% from 33% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 53%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Petron Malaysia Refining & Marketing Bhd. However, despite the promising trends, the stock has fallen 22% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 4 warning signs with Petron Malaysia Refining & Marketing Bhd (at least 2 which are potentially serious) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.