There Are Reasons To Feel Uneasy About Ark Restaurants' (NASDAQ:ARKR) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Ark Restaurants (NASDAQ:ARKR), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Ark Restaurants is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.089 = US$11m ÷ (US$162m - US$34m) (Based on the trailing twelve months to January 2022).

Therefore, Ark Restaurants has an ROCE of 8.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.

Check out our latest analysis for Ark Restaurants

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ark Restaurants' ROCE against it's prior returns. If you're interested in investigating Ark Restaurants' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Ark Restaurants' ROCE Trending?

On the surface, the trend of ROCE at Ark Restaurants doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Ark Restaurants' ROCE

While returns have fallen for Ark Restaurants in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 18% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Ark Restaurants does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.