J&J Snack Foods (NASDAQ:JJSF) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at J&J Snack Foods (NASDAQ:JJSF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for J&J Snack Foods, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.084 = US$94m ÷ (US$1.3b - US$188m) (Based on the trailing twelve months to June 2023).

Therefore, J&J Snack Foods has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.

See our latest analysis for J&J Snack Foods

In the above chart we have measured J&J Snack Foods' 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 J&J Snack Foods' ROCE Trend?

On the surface, the trend of ROCE at J&J Snack Foods doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.4% from 15% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From J&J Snack Foods' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that J&J Snack Foods is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 20% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, J&J Snack Foods does come with some risks, and we've found 1 warning sign that you should be aware of.

While J&J Snack Foods isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.