Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. However, after briefly looking over the numbers, we don't think Golden House (TLV:GOHO) 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)?
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)
0.033 = ₪18m ÷ (₪796m - ₪246m) (Based on the trailing twelve months to September 2023).
Therefore, Golden House has an ROCE of 3.3%. On its own, that's a low figure but it's around the 3.5% average generated by the Healthcare industry.
View our latest analysis for Golden House
Historical performance is a great place to start when researching a stock so above you can see the gauge for Golden House's ROCE against it's prior returns. If you're interested in investigating Golden House's past further, check out this free graph covering Golden House's past earnings, revenue and cash flow.
How Are Returns Trending?
The returns on capital haven't changed much for Golden House in recent years. The company has employed 20% more capital in the last five years, and the returns on that capital have remained stable at 3.3%. 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.
In Conclusion...
In conclusion, Golden House has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 80% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to know some of the risks facing Golden House we've found 6 warning signs (2 are a bit concerning!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
