PETRONAS Gas Berhad's (KLSE:PETGAS) Returns Have Hit A Wall

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at PETRONAS Gas Berhad (KLSE:PETGAS), it didn't seem to tick all of these boxes.

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What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for PETRONAS Gas Berhad, this is the formula:

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

0.13 = RM2.3b ÷ (RM19b - RM1.5b) (Based on the trailing twelve months to December 2024).

Thus, PETRONAS Gas Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Gas Utilities industry average of 7.9% it's much better.

View our latest analysis for PETRONAS Gas Berhad

In the above chart we have measured PETRONAS Gas 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 Gas Berhad .

What Can We Tell From PETRONAS Gas Berhad's ROCE Trend?

Things have been pretty stable at PETRONAS Gas Berhad, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if PETRONAS Gas Berhad doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that PETRONAS Gas Berhad has been paying out 82% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

The Key Takeaway

In a nutshell, PETRONAS Gas Berhad has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

PETRONAS Gas Berhad does have some risks though, and we've spotted 1 warning sign for PETRONAS Gas Berhad that you might be interested in.

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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.