The Return Trends At Premier Explosives (NSE:PREMEXPLN) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Premier Explosives' (NSE:PREMEXPLN) returns on capital, so let's have a look.

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Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Premier Explosives is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.19 = ₹520m ÷ (₹5.1b - ₹2.4b) (Based on the trailing twelve months to December 2024).

Thus, Premier Explosives has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 13% it's much better.

Check out our latest analysis for Premier Explosives

Historical performance is a great place to start when researching a stock so above you can see the gauge for Premier Explosives' ROCE against it's prior returns. If you're interested in investigating Premier Explosives' past further, check out this free graph covering Premier Explosives' past earnings, revenue and cash flow.

How Are Returns Trending?

Shareholders will be relieved that Premier Explosives has broken into profitability. The company now earns 19% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 47% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Premier Explosives' ROCE

To sum it up, Premier Explosives is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 4,101% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Premier Explosives can keep these trends up, it could have a bright future ahead.

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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.