Arko's (NASDAQ:ARKO) Returns On Capital Are Heading Higher
Arko (NASDAQ:ARKO) is showing an upward trend in its return on capital employed (ROCE), now at 3.0%, although it still lags behind the industry average of 13%. The company has significantly increased its capital employed by 99% compared to five years ago, indicating potential for future growth. Despite a 58% decline in stock price over the past five years, Arko's shift to profitability and reinvestment in the business presents a possible investment opportunity. Caution is advised due to identified risks associated with the company.
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Arko's (NASDAQ:ARKO) returns on capital, so let's have a look.
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Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Arko is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = US$93m ÷ (US$3.6b - US$463m) (Based on the trailing twelve months to March 2025).
Thus, Arko has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 13%.
See our latest analysis for Arko
In the above chart we have measured Arko's 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 Arko .
What Can We Tell From Arko's ROCE Trend?
We're delighted to see that Arko is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.0% on its capital. In addition to that, Arko is employing 99% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
In summary, it's great to see that Arko has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 58% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to know some of the risks facing Arko we've found 4 warning signs (1 is concerning!) that you should be aware of before investing here.
While Arko isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
