Returns On Capital At PETRONAS Gas Berhad (KLSE:PETGAS) Have Hit The Brakes

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at PETRONAS Gas Berhad (KLSE:PETGAS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on PETRONAS Gas Berhad is:

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

0.14 = RM2.3b ÷ (RM19b - RM1.3b) (Based on the trailing twelve months to September 2024).

Thus, PETRONAS Gas Berhad has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Gas Utilities industry.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for PETRONAS Gas Berhad .

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

Over the past five years, PETRONAS Gas Berhad's ROCE and capital employed have both remained mostly flat. 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. So unless we see a substantial change at PETRONAS Gas Berhad in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That probably explains why PETRONAS Gas Berhad has been paying out 76% of its earnings as dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

In Conclusion...

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. And investors may be recognizing these trends since the stock has only returned a total of 35% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching PETRONAS Gas Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.

While PETRONAS Gas Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.