Investors Could Be Concerned With PETRONAS Chemicals Group Berhad's (KLSE:PCHEM) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at PETRONAS Chemicals Group Berhad (KLSE:PCHEM), it didn't seem to tick all of these boxes.

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. To calculate this metric for PETRONAS Chemicals Group Berhad, this is the formula:

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

0.033 = RM1.6b ÷ (RM57b - RM10b) (Based on the trailing twelve months to September 2024).

Therefore, PETRONAS Chemicals Group Berhad has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.9%.

Check out 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 .

What Does the ROCE Trend For PETRONAS Chemicals Group Berhad Tell Us?

In terms of PETRONAS Chemicals Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

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. And in the last five years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think PETRONAS Chemicals Group Berhad has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing PETRONAS Chemicals Group Berhad that you might find interesting.

While PETRONAS Chemicals Group Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.