What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Premier Foods (LON:PFD) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Premier Foods is:

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

0.088 = UK￡181m ÷ (UK￡2.3b - UK￡278m) (Based on the trailing twelve months to March 2024).

Thus, Premier Foods has an ROCE of 8.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Premier Foods .

So How Is Premier Foods' ROCE Trending?

Premier Foods has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 3,783% whilst employing roughly the same amount of capital. 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.

What We Can Learn From Premier Foods' ROCE

To sum it up, Premier Foods is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 500% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Premier Foods looks impressive, no company is worth an infinite price. The intrinsic value infographic for PFD helps visualize whether it is currently trading for a fair price.

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.

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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.