What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in John B. Sanfilippo & Son's (NASDAQ:JBSS) returns on capital, so let's have a look.
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. The formula for this calculation on John B. Sanfilippo & Son is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = US$77m ÷ (US$392m - US$107m) (Based on the trailing twelve months to March 2021).
Thus, John B. Sanfilippo & Son has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Food industry average of 10%.
In the above chart we have measured John B. Sanfilippo & Son's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From John B. Sanfilippo & Son's ROCE Trend?
John B. Sanfilippo & Son has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 58% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line
To sum it up, John B. Sanfilippo & Son is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if John B. Sanfilippo & Son can keep these trends up, it could have a bright future ahead.
John B. Sanfilippo & Son does have some risks though, and we've spotted 2 warning signs for John B. Sanfilippo & Son that you might be interested in.
John B. Sanfilippo & Son is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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