What trends should we look for to identify stocks that can multiply their value over the long term? A common approach is to find a company with increasing returns on capital employed (ROCE) coupled with growing capital employed. When you see this, it usually means that it is a company with a great business model and lots of profitable reinvestment opportunities. However, after a quick look at the numbers, we don’t believe it Pilgrim pride (NASDAQ: PPC) has what it takes to be a multi-excavator of the future, but let’s see why this might be the case.
What is return on investment (ROCE)?
If you’ve never worked with ROCE, it measures the “return” (pre-tax profit) a company generates from the capital invested in its business. The formula for this calculation on Pilgrim’s Pride is:
Return on capital employed = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.087 = $ 504 million ÷ ($ 7.5 billion – $ 1.7 billion) (based on the last twelve months through March 2021).
So, Pilgrim’s Pride has a ROCE of 8.7%. This is a low figure on its own, but it is around 10% on the average for the food industry.
Check out our latest analysis for Pilgrim’s Pride
Above you can see how the current ROCE for Pilgrim’s Pride compares to its previous ROI, but there’s only so much you can say about the past. If you want to see what analysts are predicting for the future, check out ours free Report for Pilgrim’s Pride.
How is Pilgrim’s Pride’s ROCE developing?
When we looked at the ROCE trend at Pilgrim’s Pride, we didn’t gain a lot of trust. In the past five years, returns on investments have decreased from 35% five years ago to 8.7%. The company is now using more capital, but that hasn’t moved the needle much in the last 12 months in terms of sales, so this could be due to longer-term investments. From now on, it pays to keep an eye on the company’s profits to see if those investments add to the bottom line in the end.
The story goes on
Our opinion on the ROCE from Pilgrim’s Pride
In conclusion, Pilgrim’s Pride is reinvesting funds back into the business for growth, but unfortunately it looks like sales haven’t increased much. Also, with the stock down 13% over the past five years, investors may not be overly optimistic that this trend will improve. By and large, we’re not too inspired by the underlying trends and we believe there are better chances of finding a multi-excavator elsewhere.
Like most companies, Pilgrim’s Pride carries some risks, and we have found 3 warning signs that you should know.
Pilgrim’s Pride may not get the highest return, but check that out free List of companies that generate high returns on equity with solid balance sheets.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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