If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Good Times Restaurants (NASDAQ:GTIM) looks quite promising in regards to its trends of return on capital.

What Is 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%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.3%.

View our latest analysis for Good Times Restaurants

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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?

Even though ROCE is still low in absolute terms, it's good to see it's heading 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%. So we're very much inspired by what we're seeing at Good Times Restaurants thanks to its ability to profitably reinvest capital.

Our Take On Good Times Restaurants' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Good Times Restaurants has. And since the stock has fallen 32% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Good Times Restaurants (of which 1 shouldn't be ignored!) that you should know about.