If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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.

What Is 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. To calculate this metric for El Pollo Loco Holdings, this is the formula:

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

0.059 = US$31m ÷ (US$602m - US$70m) (Based on the trailing twelve months to September 2022).

Thus, El Pollo Loco Holdings has an ROCE of 5.9%. Ultimately, that's a low return and it 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'd like, you can check out the forecasts from the analysts covering El Pollo Loco Holdings here for free.

What Does the ROCE Trend For El Pollo Loco Holdings Tell Us?

On the surface, the trend of ROCE at El Pollo Loco Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.9% from 11% five years ago. However it looks like El Pollo Loco Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From El Pollo Loco Holdings' ROCE

In summary, El Pollo Loco Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 7.7% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you're still interested in El Pollo Loco Holdings it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While El Pollo Loco Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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