The Returns At J. M. Smucker (NYSE:SJM) Aren't Growing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating J. M. Smucker (NYSE:SJM), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for J. M. Smucker:

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

0.091 = US$1.2b ÷ (US$15b - US$2.0b) (Based on the trailing twelve months to April 2023).

So, J. M. Smucker has an ROCE of 9.1%. On its own, that's a low figure but it's around the 9.7% average generated by the Food industry.

See our latest analysis for J. M. Smucker

Above you can see how the current ROCE for J. M. Smucker 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 J. M. Smucker here for free.

What Can We Tell From J. M. Smucker's ROCE Trend?

Over the past five years, J. M. Smucker's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect J. M. Smucker to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that J. M. Smucker has been paying out a decent 43% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Bottom Line

In summary, J. M. Smucker isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 53% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 3 warning signs for J. M. Smucker you'll probably want to know about.

While J. M. Smucker 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.