Here's What's Concerning About Tenaga Nasional Berhad's (KLSE:TENAGA) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Tenaga Nasional Berhad (KLSE:TENAGA), 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. 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)

0.054 = RM9.0b ÷ (RM204b - RM37b) (Based on the trailing twelve months to September 2022).

Therefore, Tenaga Nasional Berhad has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 7.5%.

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 report for Tenaga Nasional Berhad.

What The Trend Of ROCE Can Tell Us

In terms of Tenaga Nasional Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.1%, but since then they've fallen to 5.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Tenaga Nasional Berhad's ROCE

While returns have fallen for Tenaga Nasional Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 19% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Tenaga Nasional Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Tenaga Nasional Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.