There Are Reasons To Feel Uneasy About El Pollo Loco Holdings' (NASDAQ:LOCO) Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for El Pollo Loco Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = US$33m ÷ (US$590m - US$64m) (Based on the trailing twelve months to March 2023).
Therefore, El Pollo Loco Holdings has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.8%.
See our latest analysis for El Pollo Loco Holdings
In the above chart we have measured El Pollo Loco Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering El Pollo Loco Holdings here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at El Pollo Loco Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.4% from 11% five years ago. However it looks like El Pollo Loco Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 El Pollo Loco Holdings' ROCE
To conclude, we've found that El Pollo Loco Holdings is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
While El Pollo Loco Holdings doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
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.
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