Capital Allocation Trends At PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 PETRONAS Chemicals Group Berhad (KLSE:PCHEM), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for PETRONAS Chemicals Group Berhad:

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

0.053 = RM2.7b ÷ (RM62b - RM9.6b) (Based on the trailing twelve months to June 2024).

So, PETRONAS Chemicals Group Berhad has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.0%.

See our latest analysis for PETRONAS Chemicals Group Berhad

In the above chart we have measured PETRONAS Chemicals Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for PETRONAS Chemicals Group Berhad .

How Are Returns Trending?

In terms of PETRONAS Chemicals Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From PETRONAS Chemicals Group Berhad's ROCE

In summary, PETRONAS Chemicals Group Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. 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 Chemicals Group Berhad has the makings of a multi-bagger.

Like most companies, PETRONAS Chemicals Group Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

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.