Tenaga Nasional Berhad (KLSE:TENAGA) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Tenaga Nasional Berhad (KLSE:TENAGA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Tenaga Nasional Berhad is:

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

0.051 = RM8.6b ÷ (RM203b - RM34b) (Based on the trailing twelve months to March 2023).

Thus, Tenaga Nasional Berhad has an ROCE of 5.1%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 6.2%.

View our latest analysis for Tenaga Nasional Berhad

In the above chart we have measured Tenaga Nasional 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 Tenaga Nasional Berhad here for free.

SWOT Analysis for Tenaga Nasional Berhad

The Trend Of ROCE

In terms of Tenaga Nasional Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.1% from 6.8% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Tenaga Nasional Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tenaga Nasional Berhad. And there could be an opportunity here if other metrics look good too, because the stock has declined 11% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 2 warning signs for Tenaga Nasional Berhad (1 can't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.