If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think GoodRx Holdings (NASDAQ:GDRX) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on GoodRx Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = US$39m ÷ (US$1.6b - US$76m) (Based on the trailing twelve months to December 2022).
So, GoodRx Holdings has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Healthcare Services industry average of 5.6%.
Above you can see how the current ROCE for GoodRx Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering GoodRx Holdings here for free.
So How Is GoodRx Holdings' ROCE Trending?
When we looked at the ROCE trend at GoodRx Holdings, we didn't gain much confidence. Around four years ago the returns on capital were 26%, but since then they've fallen to 2.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.
The Bottom Line On GoodRx Holdings' ROCE
Bringing it all together, while we're somewhat encouraged by GoodRx Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 70% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think GoodRx Holdings has the makings of a multi-bagger.
If you're still interested in GoodRx Holdings it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
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