Capital Allocation Trends At J&J Snack Foods (NASDAQ:JJSF) Aren't Ideal
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating J&J Snack Foods (NASDAQ:JJSF), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for J&J Snack Foods:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = US$112m ÷ (US$1.3b - US$165m) (Based on the trailing twelve months to December 2023).
So, J&J Snack Foods has an ROCE of 9.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.
Check out our latest analysis for J&J Snack Foods
Above you can see how the current ROCE for J&J Snack Foods 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 J&J Snack Foods for free.
What Does the ROCE Trend For J&J Snack Foods Tell Us?
When we looked at the ROCE trend at J&J Snack Foods, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
In summary, J&J Snack Foods is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 0.6% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
While J&J Snack Foods doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for JJSF on our platform.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
