What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Yellow Cake's (LON:YCA) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Yellow Cake:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = US$418m ÷ (US$1.1b - US$970k) (Based on the trailing twelve months to March 2022).
Therefore, Yellow Cake has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 12%.
Check out the opportunities and risks within the GB Trade Distributors industry.
Above you can see how the current ROCE for Yellow Cake 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 Yellow Cake here for free.
How Are Returns Trending?
Yellow Cake is displaying some positive trends. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 39%. Basically the business is earning more per dollar of capital invested and in addition to that, 373% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
In summary, it's great to see that Yellow Cake can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 100% to shareholders over the last three years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we've spotted 2 warning signs facing Yellow Cake that you might find interesting.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
About AIM:YCA
Flawless balance sheet and good value.
