Yahoo Finance JDE Peet's (AMS:JDEP) May Have Issues Allocating Its Capital
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within JDE Peet's (AMS:JDEP), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
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 JDE Peet's, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = €695m ÷ (€23b - €5.1b) (Based on the trailing twelve months to December 2023).
Therefore, JDE Peet's has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Food industry average of 10%.
View our latest analysis for JDE Peet's
In the above chart we have measured JDE Peet's' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for JDE Peet's .
What Can We Tell From JDE Peet's' ROCE Trend?
There is reason to be cautious about JDE Peet's, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect JDE Peet's to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that JDE Peet's is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 31% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a separate note, we've found 2 warning signs for JDE Peet's you'll probably want to know about.
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.
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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.
