If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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.
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. Analysts use this formula to calculate it for Pilgrim's Pride:
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).
So, Pilgrim's Pride has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 10%.
View 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 Does the ROCE Trend For Pilgrim's Pride Tell Us?
In terms of Pilgrim's Pride's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.7% from 14% five years ago. 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.
The Bottom Line On Pilgrim's Pride's ROCE
To conclude, we've found that Pilgrim's Pride is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 60% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One final note, you should learn about the 3 warning signs we've spotted with Pilgrim's Pride (including 1 which doesn't sit too well with us) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.