Tenaga Nasional Berhad's (KLSE:TENAGA) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Tenaga Nasional Berhad (KLSE:TENAGA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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)

0.046 = RM7.8b ÷ (RM201b - RM30b) (Based on the trailing twelve months to June 2023).

So, Tenaga Nasional Berhad has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 7.0%.

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, you can check out the forecasts from the analysts covering Tenaga Nasional Berhad here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Tenaga Nasional Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.3% over the last five years. 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.

The Bottom Line On 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 14% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Tenaga Nasional Berhad does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

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.