The Returns At PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Aren't Growing

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of PETRONAS Chemicals Group Berhad (KLSE:PCHEM) looks decent, right now, so lets see what the trend of returns can tell us.

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. 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)

0.17 = RM8.0b ÷ (RM52b - RM5.0b) (Based on the trailing twelve months to September 2022).

So, PETRONAS Chemicals Group Berhad has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 7.8% it's much better.

Check out our latest analysis for PETRONAS Chemicals Group Berhad

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

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

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 57% more capital into its operations. Since 17% 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.

The Bottom Line On PETRONAS Chemicals Group Berhad's ROCE

The main thing to remember is that PETRONAS Chemicals Group Berhad has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 24% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

On a final note, we found 2 warning signs for PETRONAS Chemicals Group Berhad (1 shouldn't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.