Ark Restaurants (NASDAQ:ARKR) Will Be Hoping To Turn Its Returns On Capital Around
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Ark Restaurants (NASDAQ:ARKR), it didn't seem to tick all of these boxes.
Understanding 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. Analysts use this formula to calculate it for Ark Restaurants:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = US$9.3m ÷ (US$204m - US$31m) (Based on the trailing twelve months to December 2022).
So, Ark Restaurants has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.
Check out our latest analysis for Ark Restaurants
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ark Restaurants' ROCE against it's prior returns. If you'd like to look at how Ark Restaurants has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Ark Restaurants Tell Us?
When we looked at the ROCE trend at Ark Restaurants, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.1% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Ark Restaurants has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Ark Restaurants' ROCE
While returns have fallen for Ark Restaurants in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 21% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One more thing to note, we've identified 4 warning signs with Ark Restaurants and understanding them should be part of your investment process.
While Ark Restaurants may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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