PETRONAS Gas Berhad (KLSE:PETGAS) Has Some Way To Go To Become A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating PETRONAS Gas Berhad (KLSE:PETGAS), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on PETRONAS Gas Berhad is:

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

0.13 = RM2.4b ÷ (RM20b - RM1.2b) (Based on the trailing twelve months to September 2022).

Thus, PETRONAS Gas Berhad has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Gas Utilities industry.

Check out our latest analysis for PETRONAS Gas Berhad

Above you can see how the current ROCE for PETRONAS Gas 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.

What Does the ROCE Trend For PETRONAS Gas Berhad Tell Us?

There hasn't been much to report for PETRONAS Gas Berhad's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect PETRONAS Gas Berhad to be a multi-bagger going forward. That being the case, it makes sense that PETRONAS Gas Berhad has been paying out 89% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

In Conclusion...

In summary, PETRONAS Gas Berhad isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 27% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with PETRONAS Gas Berhad and understanding this 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.