Stock Analysis

Here's What Philip Morris International's (NYSE:PM) Strong Returns On Capital Means

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NYSE:PM
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. With that in mind, the ROCE of Philip Morris International (NYSE:PM) looks attractive right now, so lets see what the trend of returns can tell us.

What is 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. To calculate this metric for Philip Morris International, this is the formula:

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

0.47 = US$12b ÷ (US$45b - US$20b) (Based on the trailing twelve months to December 2020).

So, Philip Morris International has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Tobacco industry average of 16%.

See our latest analysis for Philip Morris International

roce
NYSE:PM Return on Capital Employed February 23rd 2021

In the above chart we have measured Philip Morris International's 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.

How Are Returns Trending?

Philip Morris International deserves to be commended in regards to it's returns. The company has consistently earned 47% for the last five years, and the capital employed within the business has risen 35% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another thing to note, Philip Morris International has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Philip Morris International's ROCE

In short, we'd argue Philip Morris International has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, over the last five years, the stock has only delivered a 23% return to shareholders who held over that period. So to determine if Philip Morris International is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you want to continue researching Philip Morris International, you might be interested to know about the 3 warning signs that our analysis has discovered.

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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