Investors Shouldn't Overlook The Favourable Returns On Capital At Yum! Brands (NYSE:YUM)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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. The formula for this calculation on Yum! Brands is:

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

0.47 = US$2.5b ÷ (US$6.7b - US$1.3b) (Based on the trailing twelve months to December 2024).

So, Yum! Brands has an ROCE of 47%. That's a fantastic return and not only that, it outpaces the average of 9.6% earned by companies in a similar industry.

Check out our latest analysis for Yum! Brands

In the above chart we have measured Yum! Brands' 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 Yum! Brands for free.

So How Is Yum! Brands' ROCE Trending?

We'd be pretty happy with returns on capital like Yum! Brands. The company has employed 48% more capital in the last five years, and the returns on that capital have remained stable at 47%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Yum! Brands has done well to reduce current liabilities to 19% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

Yum! Brands has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 156% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Yum! Brands does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

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.