Investors Will Want Premier Foods' (LON:PFD) Growth In ROCE To Persist
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 on that note, Premier Foods (LON:PFD) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Premier Foods:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = UK£131m ÷ (UK£2.5b - UK£293m) (Based on the trailing twelve months to October 2022).
Therefore, Premier Foods has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Food industry average of 8.7%.
View our latest analysis for Premier Foods
Above you can see how the current ROCE for Premier Foods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Premier Foods here for free.
What Can We Tell From Premier Foods' ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 5.8%. The amount of capital employed has increased too, by 22%. So we're very much inspired by what we're seeing at Premier Foods thanks to its ability to profitably reinvest capital.
In Conclusion...
All in all, it's terrific to see that Premier Foods is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 239% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we've found 1 warning sign for Premier Foods that we think you should be aware of.
While Premier Foods isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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