What are the first trends we should look for to identify a stock that could multiply its value in the long term? A common approach is to try to find a company with returns on capital employed (ROCE) that are increasing, along with a growing Amount of capital employed. This shows us that it is a capitalization machine, capable of continually reinvesting its profits in the business and generating higher returns. Speaking of which, we noticed some big changes in yellow cake (LON:YCA) returns on capital, so let’s take a look.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a metric to assess 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 Yellow Cake:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.39 = 418 million US dollars ÷ (1.1 trillion US dollars – 970 thousand US dollars) (Based on the last twelve months up to March 2022).
Therefore, Yellow Cake has a ROCE of 39%. In absolute terms, that’s a great return and is even better than the trade dealer industry average of 12%.
review the opportunities and risks within the GB Trade Distributors industry.
Above you can see how Yellow Cake’s current ROCE compares to its previous equity returns, but there’s not much I can say about the past. If you want, you can check out analyst forecasts covering Yellow Cake here for free.
What is the return trend?
Yellow Cake is showing some positive trends. The numbers show that in the last three years, the returns generated on the capital employed have grown considerably to 39%. Essentially, the company is earning more per dollar of capital invested, and on top of that, 373% more capital is now being employed as well. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, a combination that is common among multi-packers.
The bottom line
In short, it’s great to see that Yellow Cake can increase returns by constantly reinvesting capital at increasing rates of return, because these are some of the key ingredients of highly sought after multi-bags. With stocks having returned a staggering 100% to shareholders in the last three years, it seems investors are recognizing these changes. Therefore, we think it would be worth your while to see if these trends are going to continue.
One more thing, we’ve seen 2 warning signs in front of Yellow Cake that you may find interesting.
If you want to see other companies getting high returns, check out our free list of companies earning high returns with strong balance sheets here.
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This Simply Wall St article is general in nature. We provide feedback based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St does not have a position in any of the mentioned stocks.