Today we are going to look at Pilgrim's Pride Corporation (NASDAQ:PPC) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Pilgrim's Pride:
0.13 = US$689m ÷ (US$7.1b - US$1.6b) (Based on the trailing twelve months to December 2019.)
Therefore, Pilgrim's Pride has an ROCE of 13%.
Does Pilgrim's Pride Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Pilgrim's Pride's ROCE is meaningfully better than the 8.9% average in the Food industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Pilgrim's Pride's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Pilgrim's Pride currently has an ROCE of 13%, less than the 21% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Pilgrim's Pride's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Pilgrim's Pride.
Pilgrim's Pride's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Pilgrim's Pride has total assets of US$7.1b and current liabilities of US$1.6b. As a result, its current liabilities are equal to approximately 23% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Pilgrim's Pride's ROCE
With that in mind, Pilgrim's Pride's ROCE appears pretty good. Pilgrim's Pride looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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