J&J Snack Foods' (NASDAQ:JJSF) Returns On Capital Not Reflecting Well On The Business
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. The formula for this calculation on J&J Snack Foods is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = US$60m ÷ (US$1.2b - US$160m) (Based on the trailing twelve months to December 2022).
So, J&J Snack Foods has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Food industry average of 10%.
See 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 here for free.
What Does the ROCE Trend For J&J Snack Foods Tell Us?
In terms of J&J Snack Foods' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 5.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
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 14% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
J&J Snack Foods does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...
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.
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