Returns On Capital Signal Tricky Times Ahead For Tenaga Nasional Berhad (KLSE:TENAGA)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Tenaga Nasional Berhad (KLSE:TENAGA) and its ROCE trend, we weren't exactly thrilled.

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. 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 = RM6.9b ÷ (RM202b - RM31b) (Based on the trailing twelve months to September 2023).

Therefore, 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 6.9%.

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 Can We Tell From Tenaga Nasional Berhad's ROCE Trend?

In terms of Tenaga Nasional Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.8%, but since then they've fallen to 4.1%. However it looks like Tenaga Nasional Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Tenaga Nasional Berhad's ROCE

To conclude, we've found that Tenaga Nasional Berhad is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 8.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to know some of the risks facing Tenaga Nasional Berhad we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Tenaga Nasional 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.