If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Perdana Petroleum Berhad (KLSE:PERDANA) and its trend of ROCE, we really liked what we saw.
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 Perdana Petroleum Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = RM103m ÷ (RM927m - RM118m) (Based on the trailing twelve months to March 2024).
Thus, Perdana Petroleum Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 10% it's much better.
View our latest analysis for Perdana Petroleum Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Perdana Petroleum Berhad's ROCE against it's prior returns. If you'd like to look at how Perdana Petroleum Berhad has performed in the past in other metrics, you can view this free graph of Perdana Petroleum Berhad's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Perdana Petroleum Berhad is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 13% on its capital. In addition to that, Perdana Petroleum Berhad is employing 95% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 13%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Perdana Petroleum Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.