If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into PETRONAS Dagangan Berhad (KLSE:PETDAG), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for PETRONAS Dagangan Berhad, this is the formula:

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

0.17 = RM1.0b ÷ (RM20b - RM14b) (Based on the trailing twelve months to September 2022).

Thus, PETRONAS Dagangan Berhad has an ROCE of 17%. That's a pretty standard return and it's in line with the industry average of 17%.

See our latest analysis for PETRONAS Dagangan Berhad

In the above chart we have measured PETRONAS Dagangan 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 PETRONAS Dagangan Berhad here for free.

What Does the ROCE Trend For PETRONAS Dagangan Berhad Tell Us?

We are a bit worried about the trend of returns on capital at PETRONAS Dagangan Berhad. Unfortunately the returns on capital have diminished from the 24% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on PETRONAS Dagangan Berhad becoming one if things continue as they have.

On a side note, PETRONAS Dagangan Berhad's current liabilities have increased over the last five years to 69% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.