Returns On Capital At PETRONAS Gas Berhad (KLSE:PETGAS) Have Stalled

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. In light of that, when we looked at PETRONAS Gas Berhad (KLSE:PETGAS) and its ROCE trend, we weren't exactly thrilled.

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. 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 = RM2.3b ÷ (RM18b - RM1.1b) (Based on the trailing twelve months to June 2024).

So, 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.

See 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, you can check out the forecasts from the analysts covering PETRONAS Gas Berhad for free.

What The Trend Of ROCE Can 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. So don't be surprised if PETRONAS Gas Berhad doesn't end up being a multi-bagger in a few years time. On top of that you'll notice that PETRONAS Gas Berhad has been paying out a large portion (78%) of earnings in the form of 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.

What We Can Learn From PETRONAS Gas Berhad's ROCE

In summary, PETRONAS Gas Berhad isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for PETRONAS Gas Berhad that we think 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.