Slowing Rates Of Return At PriceSmart (NASDAQ:PSMT) Leave Little Room For Excitement
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at PriceSmart's (NASDAQ:PSMT) ROCE trend, we were pretty happy with what we saw.
Understanding 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. Analysts use this formula to calculate it for PriceSmart:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$208m ÷ (US$2.0b - US$705m) (Based on the trailing twelve months to November 2023).
So, PriceSmart has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Retailing industry.
See our latest analysis for PriceSmart
Above you can see how the current ROCE for PriceSmart compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for PriceSmart .
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 53% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that PriceSmart has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Key Takeaway
In the end, PriceSmart has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 37% over the last five years for shareholders who have owned the stock in this period. So to determine if PriceSmart is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
PriceSmart could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for PSMT on our platform quite valuable.
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.
