What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. That’s why when we briefly looked at Philip Morris International’s (NYSE:PM) ROCE trend, we were very 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. The formula for this calculation on Philip Morris International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.36 = US$12b ÷ (US$62b – US$27b) (Based on the trailing twelve months to December 2022).
So, Philip Morris International has an ROCE of 36%. In absolute terms that’s a great return and it’s even better than the Tobacco industry average of 11%.
Above you can see how the current ROCE for Philip Morris International 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 Philip Morris International here for free.
The Trend Of ROCE
We’d be pretty happy with returns on capital like Philip Morris International. The company has consistently earned 36% for the last five years, and the capital employed within the business has risen 27% in that time. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. If Philip Morris International can keep this up, we’d be very optimistic about its future.
On a separate but related note, it’s important to know that Philip Morris International has a current liabilities to total assets ratio of 44%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Philip Morris International’s ROCE
In summary, we’re delighted to see that Philip Morris International has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. In light of this, the stock has only gained 26% over the last five years for shareholders who have owned the stock in this period. So because of the trends we’re seeing, we’d recommend looking further into this stock to see if it has the makings of a multi-bagger.
One more thing to note, we’ve identified 2 warning signs with Philip Morris International and understanding these should be part of your investment process.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here