Here's What's Concerning About GoodRx Holdings' (NASDAQ:GDRX) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.026 = US$38m ÷ (US$1.5b - US$59m) (Based on the trailing twelve months to March 2022).

So, GoodRx Holdings has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 8.0%.

See our latest analysis for GoodRx Holdings

Above you can see how the current ROCE for GoodRx Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For GoodRx Holdings Tell Us?

In terms of GoodRx Holdings' historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 2.6% from 30% three years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On GoodRx Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that GoodRx Holdings is reinvesting for growth and has higher sales as a result. But since the stock has dived 77% in the last year, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

On a final note, we've found 1 warning sign for GoodRx Holdings 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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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.