Will Pilgrim's Pride (NASDAQ:PPC) Multiply In Value Going Forward?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Understanding Return On Capital Employed (ROCE)

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 Pilgrim's Pride, this is the formula:

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

0.078 = US$430m ÷ (US$7.5b - US$1.9b) (Based on the trailing twelve months to December 2020).

Therefore, Pilgrim's Pride has an ROCE of 7.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

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, you can check out the forecasts from the analysts covering Pilgrim's Pride here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Pilgrim's Pride doesn't inspire confidence. Around five years ago the returns on capital were 43%, but since then they've fallen to 7.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Bottom Line

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 7.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 3 warning signs with Pilgrim's Pride and understanding them should be part of your investment process.

While Pilgrim's Pride 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. 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.
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