Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at PG's (MTSE:PG) ROCE trend, we were very happy with what we saw.
Understanding 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. Analysts use this formula to calculate it for PG:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = €15m ÷ (€104m - €30m) (Based on the trailing twelve months to October 2020).
So, PG has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 9.4%.
See our latest analysis for PG
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating PG's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is PG's ROCE Trending?
It's hard not to be impressed by PG's returns on capital. Over the past four years, ROCE has remained relatively flat at around 20% and the business has deployed 59% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If PG can keep this up, we'd be very optimistic about its future.
The Bottom Line
PG has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And since the stock has risen strongly over the last three years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know about the risks facing PG, we've discovered 1 warning sign that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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This article by Simply Wall St is general in nature. 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.
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About MTSE:PG
PG
Engages in the supermarket, real estate, and fashion retail business activities in Malta.
Excellent balance sheet with acceptable track record.
