Buyers who’re in a position to look previous an organization’s short-term challenges can generate nice returns. During the last 5 years, one FTSE 250 inventory has been an incredible illustration of this.

The Premier Meals (LSE:PFD) share price has gone from 45p in 2020 to over £2 in the present day. And there’s an necessary lesson for traders on this.

What’s occurred?

Premier Meals isn’t a very dynamic enterprise. It manufactures a spread of branded and own-label packaged meals, starting from truffles to cooking sauces.

It’s the kind of firm the place returns are usually regular, moderately than spectacular. However over the past 5 years, each the enterprise and the inventory have completed extremely properly.

Gross sales have elevated, margins have widened, and the corporate has reinstated its dividend. And this has brought on the share price to rise sharply. 

One of many key enhancements has been the agency’s stability sheet. Since 2020, long-term debt has decreased from £501m to £326m, leading to decrease curiosity funds and better earnings.

This, nevertheless, appears unlikely to proceed. The corporate is now in a robust monetary place, so I’m cautious of how a lot scope there’s for future enhancements on this entrance.

Consequently, I’m trying round for the subsequent main alternative. And there’s a inventory that’s been catching my eye not too long ago as one to take a more in-depth have a look at. 

The subsequent large factor?

Rentokil Preliminary (LSE:RTO) has so much in widespread with Premier Meals. It operates in an business the place demand is comparatively steady and it has a big aggressive place.

Like Premier Meals in 2020, Rentokil additionally has lots of debt on its stability sheet. Lengthy-term borrowings are roughly double the place they had been 5 years in the past. 

This, nevertheless, is the results of an enormous acquisition in 2022. And I believe because the debt degree decreases and curiosity funds fall, there’s a good likelihood of earnings transferring larger.

Earlier this week, although, the corporate hit a setback as CEO Andy Ransom introduced his intention to retire in 2026. With the agency nonetheless in transition, a change in management is a danger.

Regardless of this, I believe there’s clear scope for the corporate to maintain transferring ahead. Indicators of operational efficiencies are beginning to seem and the debt degree is beginning to lower.

I’m subsequently optimistic that this could be an identical story to Premier Meals from 5 years in the past. I’m not saying a 300% return is on the playing cards, however the two appear to have so much in widespread.

Silly takeaway

Rentokil’s current outcomes have been considerably underwhelming. The mixing of its large acquisition has taken longer than lots of shareholders had been anticipating. 

I believe, nevertheless, there are clear causes for optimism. And I’m struck by the similarities between the corporate proper now and Premier Meals once I first noticed it in 2020. 

I missed out on the FTSE 250 inventory again then as a result of I used to be involved about its debt ranges. However I’m decided to not make the identical mistake once more.