PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Will Want To Turn Around Its Return Trends

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think PETRONAS Chemicals Group Berhad (KLSE:PCHEM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 PETRONAS Chemicals Group Berhad is:

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

0.049 = RM2.5b ÷ (RM59b - RM7.7b) (Based on the trailing twelve months to September 2023).

Thus, PETRONAS Chemicals Group Berhad has an ROCE of 4.9%. On its own, that's a low figure but it's around the 6.1% average generated by the Chemicals industry.

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at PETRONAS Chemicals Group Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 18% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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

In summary, despite lower returns in the short term, we're encouraged to see that PETRONAS Chemicals Group Berhad is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 2 warning signs for PETRONAS Chemicals Group Berhad you'll probably want to know about.

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.