Today we'll evaluate John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
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 John B. Sanfilippo & Son:
0.22 = US$64m ÷ (US$393m - US$104m) (Based on the trailing twelve months to September 2019.)
So, John B. Sanfilippo & Son has an ROCE of 22%.
Does John B. Sanfilippo & Son Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. John B. Sanfilippo & Son's ROCE appears to be substantially greater than the 8.7% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, John B. Sanfilippo & Son's ROCE currently appears to be excellent.
You can click on the image below to see (in greater detail) how John B. Sanfilippo & Son's past growth compares to other companies.
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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for John B. Sanfilippo & Son.
Do John B. Sanfilippo & Son's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
John B. Sanfilippo & Son has total liabilities of US$104m and total assets of US$393m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
What We Can Learn From John B. Sanfilippo & Son's ROCE
Low current liabilities and high ROCE is a good combination, making John B. Sanfilippo & Son look quite interesting. John B. Sanfilippo & Son looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.