If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. And in light of that, the trends we're seeing at John B. Sanfilippo & Son's (NASDAQ:JBSS) look very promising so lets take a look.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for John B. Sanfilippo & Son, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = US$74m ÷ (US$397m - US$118m) (Based on the trailing twelve months to September 2020).
So, 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 7.9%.
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 The Trend Of ROCE Can Tell Us
John B. Sanfilippo & Son has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 57% in that same time. 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 On John B. Sanfilippo & Son's ROCE
To bring it all together, John B. Sanfilippo & Son has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 94% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.
John B. Sanfilippo & Son does have some risks though, and we've spotted 1 warning sign for John B. Sanfilippo & Son that you might be interested in.
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