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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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.
Return On Capital Employed (ROCE): What Is It?
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)
0.078 = US$41m ÷ (US$594m – US$75m) (Based on the trailing twelve months to June 2024).
So, El Pollo Loco Holdings has an ROCE of 7.8%. In absolute terms, that’s a low return and it also under-performs the Hospitality industry average of 10%.
View 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’re interested, you can view the analysts predictions in our free analyst report for El Pollo Loco Holdings .
The Trend Of ROCE
There hasn’t been much to report for El Pollo Loco Holdings’ returns and its level of capital employed because both metrics have been steady for the past five years. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. So don’t be surprised if El Pollo Loco Holdings doesn’t end up being a multi-bagger in a few years time.
The Bottom Line
In summary, El Pollo Loco Holdings isn’t compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 30% to shareholders over the last five years. So if you’re looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you’re still interested in El Pollo Loco Holdings it’s worth checking out our FREE intrinsic value approximation for LOCO to see if it’s trading at an attractive price in other respects.
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.
Read More: El Pollo Loco Holdings (NASDAQ:LOCO) Has More To Do To Multiply In Value Going Forward