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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Good Times Restaurants' (NASDAQ:GTIM) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Good Times Restaurants, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = US$1.5m ÷ (US$90m - US$17m) (Based on the trailing twelve months to June 2024).
Thus, Good Times Restaurants has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.6%.
View our latest analysis for Good Times Restaurants
Historical performance is a great place to start when researching a stock so above you can see the gauge for Good Times Restaurants' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Good Times Restaurants.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 2.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 39% more capital is being employed now too. So we're very much inspired by what we're seeing at Good Times Restaurants thanks to its ability to profitably reinvest capital.
Our Take On Good Times Restaurants' ROCE
All in all, it's terrific to see that Good Times Restaurants is reaping the rewards from prior investments and is growing its capital base. And with a respectable 63% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Good Times Restaurants can keep these trends up, it could have a bright future ahead.