Be Wary Of Tenaga Nasional Berhad (KLSE:TENAGA) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Tenaga Nasional Berhad (KLSE:TENAGA) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Tenaga Nasional Berhad:

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

0.041 = RM7.1b ÷ (RM205b - RM33b) (Based on the trailing twelve months to December 2023).

Thus, Tenaga Nasional Berhad has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 6.1%.

View our latest analysis for Tenaga Nasional Berhad

Above you can see how the current ROCE for Tenaga Nasional Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Tenaga Nasional Berhad .

What Does the ROCE Trend For Tenaga Nasional Berhad Tell Us?

In terms of Tenaga Nasional Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.3% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Tenaga Nasional Berhad's ROCE

In summary, we're somewhat concerned by Tenaga Nasional Berhad's diminishing returns on increasing amounts of capital. However the stock has delivered a 43% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Tenaga Nasional Berhad (including 1 which is significant) .

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.