Stock Analysis

Here's What's Concerning About PETRONAS Chemicals Group Berhad's (KLSE:PCHEM) Returns On Capital

KLSE:PCHEM
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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at PETRONAS Chemicals Group Berhad (KLSE:PCHEM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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)

0.047 = RM2.4b ÷ (RM61b - RM9.3b) (Based on the trailing twelve months to March 2024).

So, PETRONAS Chemicals Group Berhad has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.3%.

See our latest analysis for PETRONAS Chemicals Group Berhad

roce
KLSE:PCHEM Return on Capital Employed June 17th 2024

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'd like, you can check out the forecasts from the analysts covering PETRONAS Chemicals Group Berhad for free.

What Can We Tell From PETRONAS Chemicals Group Berhad's ROCE Trend?

When we looked at the ROCE trend at PETRONAS Chemicals Group Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 4.7%. However it looks like PETRONAS Chemicals Group Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On PETRONAS Chemicals Group Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by PETRONAS Chemicals Group Berhad's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with PETRONAS Chemicals Group Berhad and understanding it should be part of your investment process.

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.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com