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. So when we looked at the ROCE trend of PETRONAS Dagangan Berhad (KLSE:PETDAG) we really liked what we saw.
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. Analysts use this formula to calculate it for PETRONAS Dagangan Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = RM1.3b ÷ (RM12b - RM5.5b) (Based on the trailing twelve months to June 2024).
Therefore, PETRONAS Dagangan Berhad has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.
See our latest analysis for PETRONAS Dagangan Berhad
Above you can see how the current ROCE for PETRONAS Dagangan 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 Dagangan Berhad .
What Does the ROCE Trend For PETRONAS Dagangan Berhad Tell Us?
PETRONAS Dagangan Berhad has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 23% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
On a separate but related note, it's important to know that PETRONAS Dagangan Berhad has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On PETRONAS Dagangan Berhad's ROCE
As discussed above, PETRONAS Dagangan Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 10% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.