Yahoo Finance Returns On Capital At El Pollo Loco Holdings (NASDAQ:LOCO) Have Stalled
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at El Pollo Loco Holdings (NASDAQ:LOCO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for El Pollo Loco Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$38m ÷ (US$598m - US$75m) (Based on the trailing twelve months to March 2024).
Therefore, El Pollo Loco Holdings has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.5%.
Check out our latest analysis for El Pollo Loco Holdings
Above you can see how the current ROCE for El Pollo Loco Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for El Pollo Loco Holdings .
What Does the ROCE Trend For El Pollo Loco Holdings Tell Us?
There hasn't been much to report for El Pollo Loco Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect El Pollo Loco Holdings to be a multi-bagger going forward.
What We Can Learn From El Pollo Loco Holdings' ROCE
In summary, El Pollo Loco Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 1.5% 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.
Like most companies, El Pollo Loco Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.
While El Pollo Loco Holdings 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.
