We Like These Underlying Return On Capital Trends At Good Times Restaurants (NASDAQ:GTIM)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Good Times Restaurants (NASDAQ:GTIM) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Good Times Restaurants:

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

0.035 = US$2.7m ÷ (US$91m - US$14m) (Based on the trailing twelve months to June 2023).

So, Good Times Restaurants has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.5%.

View 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.

What Does the ROCE Trend For Good Times Restaurants Tell Us?

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 numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.5%. The amount of capital employed has increased too, by 56%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line 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. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Good Times Restaurants, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

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.