Jack in the Box Inc (NASDAQ:JACK)’s Return on Capital

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Jack in the Box Inc (NASDAQ:JACK).

Buying Jack in the Box makes you a partial owner of the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Jack in the Box, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

Check out our latest analysis for Jack in the Box

Jack in the Box’s Return On Capital Employed

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Jack in the Box’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). JACK’s ROCE is calculated below:

ROCE Calculation for JACK

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US$185.34m ÷ (US$875.04m – US$167.54m) = 26.20%

The calculation above shows that JACK’s earnings were 26.20% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by JACK and means the company creates an excellent amount of earnings on capital employed. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound extremely well over time.

NasdaqGS:JACK Last Perf August 3rd 18
NasdaqGS:JACK Last Perf August 3rd 18

Does this mean I should invest?

Jack in the Box’s relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Jack in the Box is in a favourable position, but this can change if these factors underperform. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Jack in the Box will continue the solid returns. If you go back three years, you’ll find that JACK’s ROCE has increased from 16.68%. With this, the current earnings of US$185.34m improved from US$176.96m and the amount of capital employed has decreased as a result of a decline in total assets , which is an indication that Jack in the Box has increased the ROCE for investors by producing more earnings and using less capital.

Next Steps

Jack in the Box’s ROCE has increased in the recent past and is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you don’t pay attention to these factors you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. Jack in the Box’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Future Outlook: What are well-informed industry analysts predicting for JACK’s future growth? Take a look at our free research report of analyst consensus for JACK’s outlook.
  2. Valuation: What is JACK worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether JACK is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.