Capital Allocation Trends At Pilgrim's Pride (NASDAQ:PPC) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Pilgrim's Pride (NASDAQ:PPC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Pilgrim's Pride is:

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

0.047 = US$349m ÷ (US$9.9b - US$2.5b) (Based on the trailing twelve months to September 2023).

Therefore, Pilgrim's Pride has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Food industry average of 10%.

See our latest analysis for Pilgrim's Pride

In the above chart we have measured Pilgrim's Pride'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 Pilgrim's Pride's ROCE Trend?

When we looked at the ROCE trend at Pilgrim's Pride, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 4.7%. However it looks like Pilgrim's Pride might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Pilgrim's Pride's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 3 warning signs for Pilgrim's Pride (1 shouldn't be ignored) you should be aware of.

While Pilgrim's Pride may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.