What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at JDE Peet's (AMS:JDEP), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for JDE Peet's, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = €762m ÷ (€22b - €4.7b) (Based on the trailing twelve months to June 2023).
Therefore, JDE Peet's has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.5%.
See our latest analysis for JDE Peet's
Above you can see how the current ROCE for JDE Peet's compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for JDE Peet's.
So How Is JDE Peet's' ROCE Trending?
There hasn't been much to report for JDE Peet's' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect JDE Peet's to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that JDE Peet's has been paying out a decent 38% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
In Conclusion...
In summary, JDE Peet's isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last three years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think JDE Peet's has the makings of a multi-bagger.
If you want to continue researching JDE Peet's, you might be interested to know about the 2 warning signs that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About ENXTAM:JDEP
Undervalued with proven track record.
