YouGov (LON:YOU) Is Very Good At Capital Allocation

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of YouGov (LON:YOU) we really liked what we saw.

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 YouGov:

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

0.20 = UK£26m ÷ (UK£196m - UK£67m) (Based on the trailing twelve months to July 2021).

So, YouGov has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 8.6% earned by companies in a similar industry.

See our latest analysis for YouGov

In the above chart we have measured YouGov's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering YouGov here for free.

How Are Returns Trending?

YouGov is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. The amount of capital employed has increased too, by 61%. 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.

What We Can Learn From YouGov's 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 YouGov has. Since the stock has returned a staggering 410% to shareholders over the last five 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.

YouGov does have some risks though, and we've spotted 2 warning signs for YouGov that you might be interested in.

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.