This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Ark Restaurants Corp (NASDAQ:ARKR)’s return fundamentals and stock market performance.
Purchasing Ark Restaurants gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Ark Restaurants is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
ROCE: Explanation and Calculation
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Ark Restaurants’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. ARKR’s ROCE is calculated below:
ROCE Calculation for ARKR
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$5.0m ÷ (US$85m – US$18m) = 7.4%
The calculation above shows that ARKR’s earnings were 7.4% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which ARKR has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.
What is causing this?
Ark Restaurants’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Ark Restaurants is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of ARKR’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that ARKR weakened investor return on capital employed from 17%. In this time, earnings have fallen from US$8.4m to US$5.0m and capital employed has increased due to a hike in the level of total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
ROCE for ARKR investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for ARKR’s future growth? Take a look at our free research report of analyst consensus for ARKR’s outlook.
- Valuation: What is ARKR worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether ARKR is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.