Portillos Earnings Perspective: Return On Invested Capital

According to Benzinga Pro data Portillos PTLO posted a 70.27% decrease in earnings from Q2. Sales, however, increased by 0.33% over the previous quarter to $151.12 million. Despite the increase in sales this quarter, the decrease in earnings may suggest Portillos is not utilizing their capital as effectively as possible. In Q2, Portillos earned $10.76 million and total sales reached $150.62 million.

Why Is ROIC Significant?

Return on Invested Capital is a measure of yearly pre-tax profit relative to capital invested by a business. Changes in earnings and sales indicate shifts in a company's ROIC. A higher ROIC is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROIC suggests the opposite. In Q3, Portillos posted an ROIC of 1.88%.

Keep in mind, while ROIC is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

ROIC is a powerful metric for comparing the effectiveness of capital allocation for similar companies. A relatively high ROIC shows Portillos is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of invested capital, some of that money can be reinvested in more capital which will generally lead to higher returns and, ultimately, earnings per share (EPS) growth.

For Portillos, the positive return on invested capital ratio of 1.88% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.