GoodRx Holdings (NASDAQ:GDRX) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at GoodRx Holdings (NASDAQ:GDRX) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for GoodRx Holdings, this is the formula:

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

0.019 = US$31m ÷ (US$1.7b - US$118m) (Based on the trailing twelve months to September 2023).

So, GoodRx Holdings has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 5.0%.

Check out our latest analysis for GoodRx Holdings

In the above chart we have measured GoodRx Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for GoodRx Holdings.

So How Is GoodRx Holdings' ROCE Trending?

In terms of GoodRx Holdings' historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 1.9% from 37% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that GoodRx Holdings is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 87% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think GoodRx Holdings has the makings of a multi-bagger.

If you want to continue researching GoodRx Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

While GoodRx Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.