The Trend Of High Returns At Yellow Cake (LON:YCA) Has Us Very Interested

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Yellow Cake's (LON:YCA) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

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 Yellow Cake:

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

0.33 = US$499m ÷ (US$1.6b - US$71m) (Based on the trailing twelve months to September 2023).

So, Yellow Cake has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 15%.

Check out our latest analysis for Yellow Cake

In the above chart we have measured Yellow Cake's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Yellow Cake .

So How Is Yellow Cake's ROCE Trending?

We're delighted to see that Yellow Cake is reaping rewards from its investments and is now generating some pre-tax profits. About four years ago the company was generating losses but things have turned around because it's now earning 33% on its capital. And unsurprisingly, like most companies trying to break into the black, Yellow Cake is utilizing 486% more capital than it was four years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Yellow Cake's ROCE

Long story short, we're delighted to see that Yellow Cake's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 186% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Yellow Cake does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.