If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at J&J Snack Foods (NASDAQ:JJSF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)
0.084 = US$94m ÷ (US$1.3b - US$188m) (Based on the trailing twelve months to June 2023).
Therefore, J&J Snack Foods has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.
In the above chart we have measured J&J Snack Foods' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering J&J Snack Foods here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at J&J Snack Foods doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 8.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From J&J Snack Foods' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for J&J Snack Foods. In light of this, the stock has only gained 19% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
One more thing to note, we've identified 1 warning sign with J&J Snack Foods and understanding it should be part of your investment process.
While J&J Snack 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.