Good Times Restaurants (NASDAQ:GTIM) Is Doing The Right Things To Multiply Its Share Price

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in Good Times Restaurants' (NASDAQ:GTIM) returns on capital, so let's have a look.

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. 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).

Thus, 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 4.9%.

Check out 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're interested in investigating Good Times Restaurants' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 16% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we've found 4 warning signs for Good Times Restaurants that we think you should be aware of.

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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