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Are Bridgford Foods Corporation’s Returns On Capital Worth Investigating?

Simply Wall St

Today we'll look at Bridgford Foods Corporation (NASDAQ:BRID) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Bridgford Foods:

0.089 = US$8.9m ÷ (US$120m - US$21m) (Based on the trailing twelve months to July 2019.)

So, Bridgford Foods has an ROCE of 8.9%.

Check out our latest analysis for Bridgford Foods

Is Bridgford Foods's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Bridgford Foods's ROCE is around the 9.2% average reported by the Food industry. Setting aside the industry comparison for now, Bridgford Foods's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Bridgford Foods's current ROCE of 8.9% is lower than 3 years ago, when the company reported a 16% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Bridgford Foods's past growth compares to other companies.

NasdaqGM:BRID Past Revenue and Net Income, January 11th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Bridgford Foods has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Bridgford Foods's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.

Bridgford Foods has total assets of US$120m and current liabilities of US$21m. As a result, its current liabilities are equal to approximately 17% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Bridgford Foods's ROCE

If Bridgford Foods continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Bridgford Foods. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.