Arcos Dorados Holdings (NYSE:ARCO) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Arcos Dorados Holdings (NYSE:ARCO) looks quite promising in regards to its trends of return on capital.

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 Arcos Dorados Holdings is:

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

0.15 = US$282m ÷ (US$2.7b - US$758m) (Based on the trailing twelve months to March 2023).

Therefore, Arcos Dorados Holdings has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.8% it's much better.

See our latest analysis for Arcos Dorados Holdings

In the above chart we have measured Arcos Dorados Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Arcos Dorados Holdings here for free.

What The Trend Of ROCE Can Tell Us

Arcos Dorados Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 65%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Arcos Dorados Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Arcos Dorados Holdings has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 75% return over the last five years. In light of that, we think it's worth looking further into this stock because if Arcos Dorados Holdings can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 2 warning signs for Arcos Dorados Holdings you'll probably want to know about.

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.