Here's What Yum! Brands' (NYSE:YUM) Strong Returns On Capital Mean

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Ergo, when we looked at the ROCE trends at Yum! Brands (NYSE:YUM), we liked what we saw.

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. To calculate this metric for Yum! Brands, this is the formula:

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

0.47 = US$2.5b ÷ (US$6.4b - US$1.1b) (Based on the trailing twelve months to June 2024).

So, Yum! Brands has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 11%.

View our latest analysis for Yum! Brands

Above you can see how the current ROCE for Yum! Brands 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 analyst report for Yum! Brands .

How Are Returns Trending?

We'd be pretty happy with returns on capital like Yum! Brands. The company has employed 51% more capital in the last five years, and the returns on that capital have remained stable at 47%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Yum! Brands can keep this up, we'd be very optimistic about its future.

In Conclusion...

Yum! Brands has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, over the last five years, the stock has only delivered a 28% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you'd like to know more about Yum! Brands, we've spotted 4 warning signs, and 2 of them are concerning.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.