Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at YouGov (LON:YOU) so let's look a bit deeper.
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. The formula for this calculation on YouGov is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = UK£29m ÷ (UK£228m - UK£70m) (Based on the trailing twelve months to January 2022).
So, YouGov has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 12% generated by the Media industry.
See our latest analysis for YouGov
Above you can see how the current ROCE for YouGov compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From YouGov's ROCE Trend?
We like the trends that we're seeing from YouGov. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 88%. 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 Key Takeaway
All in all, it's terrific to see that YouGov is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 273% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if YouGov can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 1 warning sign with YouGov and understanding this should be part of your investment process.
While YouGov isn't earning the highest return, check out this free list of companies that are 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.
About AIM:YOU
YouGov
Provides online market research services in the United Kingdom, the United States, the Middle East, Mainland Europe, Africa, and the Asia Pacific.
High growth potential average dividend payer.
