Can Good Times Restaurants (NASDAQ:GTIM) Continue To Grow Its Returns On Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Good Times Restaurants (NASDAQ:GTIM) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Good Times Restaurants is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.043 = US$3.5m ÷ (US$100m - US$19m) (Based on the trailing twelve months to September 2020).

So, Good Times Restaurants has an ROCE of 4.3%. On its own, that's a low figure but it's around the 4.6% average generated by the Hospitality industry.

View our latest analysis for Good Times Restaurants

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'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.

So How Is Good Times Restaurants' ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 98%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Good Times Restaurants' ROCE

All in all, it's terrific to see that Good Times Restaurants is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 36% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 3 warning signs for Good Times Restaurants (1 can't be ignored) you should be aware of.

While Good Times Restaurants 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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