Returns On Capital At PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Have Stalled

Simply Wall St
January 17, 2022
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. That's why when we briefly looked at PETRONAS Chemicals Group Berhad's (KLSE:PCHEM) ROCE trend, we were pretty happy with what we saw.

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)

0.14 = RM5.8b ÷ (RM45b - RM4.4b) (Based on the trailing twelve months to September 2021).

Therefore, PETRONAS Chemicals Group Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 8.5% it's much better.

See our latest analysis for PETRONAS Chemicals Group Berhad

KLSE:PCHEM Return on Capital Employed January 17th 2022

Above you can see how the current ROCE for PETRONAS Chemicals Group Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is PETRONAS Chemicals Group Berhad's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 45% in that time. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On PETRONAS Chemicals Group Berhad's ROCE

To sum it up, PETRONAS Chemicals Group Berhad has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 51% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One final note, you should learn about the 2 warning signs we've spotted with PETRONAS Chemicals Group Berhad (including 1 which is concerning) .

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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.