I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Premier Inc (NASDAQ:PINC).
Premier stock represents an ownership share in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently Premier is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Premier’s Return On Capital Employed
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Premier’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for PINC
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$526.17m ÷ (US$2.29b – US$523.92m) = 29.72%
PINC’s 29.72% ROCE means that for every $100 you invest, the company creates $29.7. This makes Premier exceptionally profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a rapid rate over time.
Not so fast
PINC is efficient with the use of capital, but this is only the case if PINC continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Premier will continue the solid returns. Looking at the past 3 year period shows us that PINC boosted investor return on capital employed from 23.53%. We can see that earnings have increased from US$292.31m to US$526.17m whilst the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.
PINC’s investors have enjoyed an upward trend in ROCE and it is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. This is an ideal situation to be in, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. Premier’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for PINC’s future growth? Take a look at our free research report of analyst consensus for PINC’s outlook.
- Valuation: What is PINC worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PINC is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.