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B&G Foods, Inc.’s (NYSE:BGS) Investment Returns Are Lagging Its Industry

Simply Wall St

Today we'll evaluate B&G Foods, Inc. (NYSE:BGS) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for B&G Foods:

0.07 = US$229m ÷ (US$3.6b - US$289m) (Based on the trailing twelve months to September 2019.)

Therefore, B&G Foods has an ROCE of 7.0%.

See our latest analysis for B&G Foods

Is B&G Foods's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see B&G Foods's ROCE is meaningfully below the Food industry average of 8.9%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how B&G Foods stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

B&G Foods's current ROCE of 7.0% is lower than 3 years ago, when the company reported a 11% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how B&G Foods's past growth compares to other companies.

NYSE:BGS Past Revenue and Net Income, December 6th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for B&G Foods.

What Are Current Liabilities, And How Do They Affect B&G Foods's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

B&G Foods has total liabilities of US$289m and total assets of US$3.6b. Therefore its current liabilities are equivalent to approximately 8.1% of its total assets. With low levels of current liabilities, at least B&G Foods's mediocre ROCE is not unduly boosted.

Our Take On B&G Foods's ROCE

B&G Foods looks like an ok business, but on this analysis it is not at the top of our buy list. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.