Stock Analysis

Tenaga Nasional Berhad (KLSE:TENAGA) May Have Issues Allocating Its Capital

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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Tenaga Nasional Berhad (KLSE:TENAGA) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tenaga Nasional Berhad, this is the formula:

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

0.055 = RM8.2b ÷ (RM177b - RM27b) (Based on the trailing twelve months to June 2021).

Therefore, Tenaga Nasional Berhad has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 5.3%.

See our latest analysis for Tenaga Nasional Berhad

KLSE:TENAGA Return on Capital Employed October 12th 2021

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.

So How Is Tenaga Nasional Berhad's ROCE Trending?

In terms of Tenaga Nasional Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.7%, but since then they've fallen to 5.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Tenaga Nasional Berhad's ROCE

In summary, Tenaga Nasional Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 10% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Tenaga Nasional Berhad, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Tenaga Nasional Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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