Returns On Capital At El Pollo Loco Holdings (NASDAQ:LOCO) Have Stalled
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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at El Pollo Loco Holdings (NASDAQ:LOCO), it didn't seem to tick all of these boxes.
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. The formula for this calculation on El Pollo Loco Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$47m ÷ (US$599m - US$73m) (Based on the trailing twelve months to September 2021).
Therefore, El Pollo Loco Holdings has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.6%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From El Pollo Loco Holdings' ROCE Trend?
In terms of El Pollo Loco Holdings' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.0% and the business has deployed 22% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On El Pollo Loco Holdings' ROCE
In summary, El Pollo Loco Holdings has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 27% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
El Pollo Loco Holdings does have some risks though, and we've spotted 1 warning sign for El Pollo Loco Holdings that you might be interested in.
While El Pollo Loco Holdings 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.
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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