Yelp (NYSE:YELP) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Yelp's (NYSE:YELP) returns on capital, so let's have a look.

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 Yelp:

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

0.085 = US$70m ÷ (US$1.0b - US$199m) (Based on the trailing twelve months to March 2023).

Thus, Yelp has an ROCE of 8.5%. On its own, that's a low figure but it's around the 8.3% average generated by the Interactive Media and Services industry.

See our latest analysis for Yelp

Above you can see how the current ROCE for Yelp compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yelp here for free.

What Can We Tell From Yelp's ROCE Trend?

We're pretty happy with how the ROCE has been trending at Yelp. We found that the returns on capital employed over the last five years have risen by 495%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Yelp appears to been achieving more with less, since the business is using 27% less capital to run its operation. Yelp may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 20% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

In a nutshell, we're pleased to see that Yelp has been able to generate higher returns from less capital. Since the stock has only returned 18% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing, we've spotted 1 warning sign facing Yelp that you might find interesting.

While Yelp may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.