Premier Investments (ASX:PMV) Is Doing The Right Things To Multiply Its Share Price

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Premier Investments (ASX:PMV) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.16 = AU$362m ÷ (AU$2.6b - AU$348m) (Based on the trailing twelve months to January 2024).

Thus, Premier Investments has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 18%.

View 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're interested, you can view the analysts predictions in our free analyst report for Premier Investments .

What Can We Tell From Premier Investments' ROCE Trend?

The trends we've noticed at Premier Investments are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 38%. 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

To sum it up, Premier Investments has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 116% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for PMV that compares the share price and estimated value.

While Premier Investments may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.