Returns At Good Times Restaurants (NASDAQ:GTIM) Are On The Way Up
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)
0.09 = US$6.9m ÷ (US$98m - US$21m) (Based on the trailing twelve months to March 2021).
Therefore, Good Times Restaurants has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 5.0%.
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'd like to look at how Good Times Restaurants has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Good Times Restaurants has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 9.0% which is a sight for sore eyes. In addition to that, Good Times Restaurants is employing 86% 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.
Our Take On Good Times Restaurants' ROCE
Overall, Good Times Restaurants gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 6.7% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Like most companies, Good Times Restaurants does come with some risks, and we've found 4 warning signs that you should be aware of.
While Good Times Restaurants may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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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