Returns On Capital Signal Tricky Times Ahead For GoodRx Holdings (NASDAQ:GDRX)

By
Simply Wall St
Published
April 19, 2022
NasdaqGS:GDRX
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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. Analysts use this formula to calculate it for GoodRx Holdings:

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

0.0088 = US$13m ÷ (US$1.6b - US$81m) (Based on the trailing twelve months to December 2021).

Therefore, GoodRx Holdings has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Healthcare Services industry average of 7.9%.

View our latest analysis for GoodRx Holdings

roce
NasdaqGS:GDRX Return on Capital Employed April 19th 2022

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'd like, you can check out the forecasts from the analysts covering GoodRx Holdings here for free.

What Can We Tell From GoodRx Holdings' ROCE Trend?

When we looked at the ROCE trend at GoodRx Holdings, we didn't gain much confidence. Around three years ago the returns on capital were 26%, but since then they've fallen to 0.9%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for GoodRx Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 55% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, GoodRx Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

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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