Here's What's Concerning About Ark Restaurants' (NASDAQ:ARKR) Returns On Capital
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Ark Restaurants (NASDAQ:ARKR) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Ark Restaurants is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$7.3m ÷ (US$187m - US$27m) (Based on the trailing twelve months to July 2023).
Thus, Ark Restaurants has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.6%.
See our latest analysis for Ark Restaurants
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 Can We Tell From Ark Restaurants' ROCE Trend?
When we looked at the ROCE trend at Ark Restaurants, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.6% from 8.6% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Ark Restaurants' ROCE
To conclude, we've found that Ark Restaurants is reinvesting in the business, but returns have been falling. Since the stock has declined 27% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you want to continue researching Ark Restaurants, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Ark Restaurants 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.
