We Like These Underlying Return On Capital Trends At Primo Brands (NYSE:PRMB)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Primo Brands' (NYSE:PRMB) returns on capital, so let's have a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Primo Brands is:

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

0.13 = US$561m ÷ (US$5.2b - US$847m) (Based on the trailing twelve months to September 2024).

Therefore, Primo Brands has an ROCE of 13%. In isolation, that's a pretty standard return but against the Beverage industry average of 16%, it's not as good.

Check out our latest analysis for Primo Brands

In the above chart we have measured Primo Brands' 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 Primo Brands for free.

What The Trend Of ROCE Can Tell Us

Primo Brands' ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 65% over the last one year. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Primo Brands' ROCE

To bring it all together, Primo Brands has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 134% 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 Primo Brands can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 2 warning signs for Primo Brands you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.