Today we are going to look at John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?
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 John B. Sanfilippo & Son:
0.17 = US$53m ÷ (US$411m – US$126m) (Based on the trailing twelve months to December 2018.)
So, John B. Sanfilippo & Son has an ROCE of 17%.
Does John B. Sanfilippo & Son Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, John B. Sanfilippo & Son’s ROCE is meaningfully higher than the 9.1% 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 where John B. Sanfilippo & Son sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do John B. Sanfilippo & Son’s Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
John B. Sanfilippo & Son has total assets of US$411m and current liabilities of US$126m. Therefore its current liabilities are equivalent to approximately 31% of its total assets. John B. Sanfilippo & Son has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On John B. Sanfilippo & Son’s ROCE
John B. Sanfilippo & Son’s ROCE does look good, but the level of current liabilities also contribute to that. Of course you might be able to find a better stock than John B. Sanfilippo & Son. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.