Returns On Capital At El Pollo Loco Holdings (NASDAQ:LOCO) Have Stalled

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think El Pollo Loco Holdings (NASDAQ:LOCO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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)

0.078 = US$41m ÷ (US$594m - US$75m) (Based on the trailing twelve months to June 2024).

Thus, 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 11%.

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 .

What Can We Tell From El Pollo Loco Holdings' ROCE Trend?

Things have been pretty stable at El Pollo Loco Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at El Pollo Loco Holdings in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From El Pollo Loco Holdings' ROCE

In summary, El Pollo Loco Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 53% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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.