If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Premier Investments' (ASX:PMV) returns on capital, so let's have a look.
What Is 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)
0.19 = AU$388m ÷ (AU$2.4b - AU$385m) (Based on the trailing twelve months to January 2023).
Thus, Premier Investments has an ROCE of 19%. That's a pretty standard return and it's in line with the industry average of 19%.
View our latest analysis for Premier Investments
In the above chart we have measured Premier Investments' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
SWOT Analysis for Premier Investments
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Earnings growth over the past year is below its 5-year average.
- Dividend is low compared to the top 25% of dividend payers in the Specialty Retail market.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to decline for the next 3 years.
What Does the ROCE Trend For Premier Investments Tell Us?
The trends we've noticed at Premier Investments are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 28%. 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. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 42% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, Premier Investments does come with some risks, and we've found 1 warning sign that you should be aware of.
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.
About ASX:PMV
Premier Investments
Operates various specialty retail fashion chains in Australia, New Zealand, Asia, and Europe.
Flawless balance sheet established dividend payer.
