If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Golden House (TLV:GOHO), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Golden House:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = ₪21m ÷ (₪778m - ₪214m) (Based on the trailing twelve months to September 2022).
Therefore, Golden House has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 13%.
View our latest analysis for Golden House
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Golden House, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Golden House in recent years. The company has consistently earned 3.8% for the last five years, and the capital employed within the business has risen 21% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
Long story short, while Golden House has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you want to know some of the risks facing Golden House we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.
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.
About TASE:GOHO
Golden House
Engages in the operation and management of sheltered housing centers for the elderly population in Israel.
Excellent balance sheet with acceptable track record.
