Philip Morris International (NYSE:PM) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So while Philip Morris International (NYSE:PM) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Philip Morris International:

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

0.31 = US$14b ÷ (US$67b - US$23b) (Based on the trailing twelve months to September 2024).

Thus, Philip Morris International has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 21% earned by companies in a similar industry.

Check out our latest analysis for Philip Morris International

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Philip Morris International .

What The Trend Of ROCE Can Tell Us

In terms of Philip Morris International's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 47% where it was five years ago. However it looks like Philip Morris International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Philip Morris International's ROCE

Bringing it all together, while we're somewhat encouraged by Philip Morris International's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 88% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Philip Morris International, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.