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Why We Like Pilgrim's Pride Corporation’s (NASDAQ:PPC) 11% Return On Capital Employed

Today we'll evaluate Pilgrim's Pride Corporation (NASDAQ:PPC) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Pilgrim's Pride:

0.11 = US$636m ÷ (US$7.3b - US$1.5b) (Based on the trailing twelve months to March 2020.)

So, Pilgrim's Pride has an ROCE of 11%.

Check out our latest analysis for Pilgrim's Pride

Does Pilgrim's Pride Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Pilgrim's Pride's ROCE appears to be substantially greater 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 11%, less than the 30% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Pilgrim's Pride's past growth compares to other companies.

NasdaqGS:PPC Past Revenue and Net Income May 27th 2020
NasdaqGS:PPC Past Revenue and Net Income May 27th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Pilgrim's Pride.

How Pilgrim's Pride's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Pilgrim's Pride has total assets of US$7.3b and current liabilities of US$1.5b. Therefore its current liabilities are equivalent to approximately 21% of its total assets. Low current liabilities are not boosting the ROCE too much.

What We Can Learn From Pilgrim's Pride's ROCE

With that in mind, Pilgrim's Pride's ROCE appears pretty good. There might be better investments than Pilgrim's Pride out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.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. 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. Thank you for reading.

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