Be Wary Of El Pollo Loco Holdings (NASDAQ:LOCO) And Its Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at El Pollo Loco Holdings (NASDAQ:LOCO), it didn't seem to tick all of these boxes.
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. 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)
0.072 = US$37m ÷ (US$593m - US$70m) (Based on the trailing twelve months to September 2023).
So, El Pollo Loco Holdings has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.1%.
See 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, 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
On the surface, the trend of ROCE at El Pollo Loco Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.2% from 10% 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 may take some time before the company starts to see any change in earnings from these investments.
Our Take On El Pollo Loco Holdings' ROCE
In summary, El Pollo Loco Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last five years. Therefore based on the analysis done in this article, we don't think El Pollo Loco Holdings has the makings of a multi-bagger.
If you'd like to know about the risks facing El Pollo Loco Holdings, we've discovered 1 warning sign that you should be aware of.
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.
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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.
