Returns At Premier Investments (ASX:PMV) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. 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)

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 Premier Investments:

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).

So, Premier Investments has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 19% generated by the Specialty Retail industry.

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'd like, you can check out the forecasts from the analysts covering Premier Investments here for free.

So How Is Premier Investments' ROCE Trending?

Premier Investments is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 35%. So we're very much inspired by what we're seeing at Premier Investments thanks to its ability to profitably reinvest capital.

Our Take On Premier Investments' ROCE

In summary, it's great to see that Premier Investments can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Premier Investments looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether PMV is currently trading for a fair price.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.