Pilgrim's Pride (NASDAQ:PPC) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Pilgrim's Pride (NASDAQ:PPC), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Pilgrim's Pride, this is the formula:

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

0.087 = US$504m ÷ (US$7.5b - US$1.7b) (Based on the trailing twelve months to March 2021).

Thus, Pilgrim's Pride has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Food industry average of 10%.

Check out our latest analysis for Pilgrim's Pride

Above you can see how the current ROCE for Pilgrim's Pride compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pilgrim's Pride.

What Can We Tell From Pilgrim's Pride's ROCE Trend?

On the surface, the trend of ROCE at Pilgrim's Pride doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.7% from 35% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Pilgrim's Pride is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Pilgrim's Pride, we've discovered 4 warning signs that you should be aware of.

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