PETRONAS Gas Berhad's (KLSE:PETGAS) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating PETRONAS Gas Berhad (KLSE:PETGAS), we don't think it's current trends fit the mold of a multi-bagger.

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 PETRONAS Gas Berhad, this is the formula:

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

0.14 = RM2.3b ÷ (RM18b - RM1.2b) (Based on the trailing twelve months to March 2024).

So, PETRONAS Gas Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Gas Utilities industry average of 8.1% it's much better.

Check out our latest analysis for PETRONAS Gas Berhad

roce

Above you can see how the current ROCE for PETRONAS Gas Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for PETRONAS Gas Berhad .

How Are Returns Trending?

Over the past five years, PETRONAS Gas Berhad's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if PETRONAS Gas Berhad doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that PETRONAS Gas Berhad has been paying out 81% of its earnings to its shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

In Conclusion...

We can conclude that in regards to PETRONAS Gas Berhad's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 32% 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'd like to know about the risks facing PETRONAS Gas Berhad, we've discovered 1 warning sign that 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.

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