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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we’ve noticed some promising trends at Premier Investments (ASX:PMV) so let’s look a bit deeper.
What Is 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. To calculate this metric for Premier Investments, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = AU$370m ÷ (AU$2.5b – AU$336m) (Based on the trailing twelve months to July 2023).
Thus, Premier Investments has an ROCE of 17%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Specialty Retail industry average of 18%.
See our latest analysis for Premier Investments
Above you can see how the current ROCE for Premier Investments 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 Premier Investments for free.
So How Is Premier Investments’ ROCE Trending?
Investors would be pleased with what’s happening at Premier Investments. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. So we’re very much inspired by what we’re seeing at Premier Investments thanks to its ability to profitably reinvest capital.
The Bottom Line On Premier Investments’ ROCE
All in all, it’s terrific to see that Premier Investments is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 130% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation for PMV on our platform that is definitely worth checking out.
While Premier Investments isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
