Yellow Cake (LON:YCA) Is Investing Its Capital With Increasing Efficiency

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Yellow Cake (LON:YCA) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What is it?

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 Yellow Cake:

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

0.26 = US$178m ÷ (US$683m - US$8.1m) (Based on the trailing twelve months to September 2021).

Thus, Yellow Cake has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 14%.

See 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 report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The fact that Yellow Cake is now generating some pre-tax profits from its prior investments is very encouraging. About two years ago the company was generating losses but things have turned around because it's now earning 26% on its capital. And unsurprisingly, like most companies trying to break into the black, Yellow Cake is utilizing 165% more capital than it was two years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Yellow Cake's ROCE

In summary, it's great to see that Yellow Cake has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 94% return over the last three years. In light of that, we think it's worth looking further into this stock because if Yellow Cake can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Yellow Cake (including 1 which is potentially serious) .

Yellow Cake is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.