What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.
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. The formula for this calculation on GoodRx Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = US$31m ÷ (US$1.7b - US$118m) (Based on the trailing twelve months to September 2023).
So, GoodRx Holdings has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 5.0%.
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 to see what analysts are forecasting going forward, you should check out our free report for GoodRx Holdings.
What Does the ROCE Trend For GoodRx Holdings Tell Us?
On the surface, the trend of ROCE at GoodRx Holdings doesn't inspire confidence. Over the last four years, returns on capital have decreased to 1.9% from 37% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
Our Take 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. Moreover, since the stock has crumbled 89% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think GoodRx Holdings has the makings of a multi-bagger.
If you'd like to know about the risks facing GoodRx Holdings, we've discovered 3 warning signs that you should be aware of.
While GoodRx Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.