Petron Malaysia Refining & Marketing Bhd's (KLSE:PETRONM) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Petron Malaysia Refining & Marketing Bhd (KLSE:PETRONM) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Petron Malaysia Refining & Marketing Bhd, this is the formula:

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

0.16 = RM338m ÷ (RM4.3b - RM2.1b) (Based on the trailing twelve months to December 2021).

So, Petron Malaysia Refining & Marketing Bhd has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 13% it's much better.

View our latest analysis for Petron Malaysia Refining & Marketing Bhd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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?

In terms of Petron Malaysia Refining & Marketing Bhd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 28% over the last five years. 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.

On a side note, Petron Malaysia Refining & Marketing Bhd's current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

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. And there could be an opportunity here if other metrics look good too, because the stock has declined 12% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Petron Malaysia Refining & Marketing Bhd does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.