Yahoo Finance The 32% Return On Capital At Yellow Pages (TSE:Y) Got Our Attention
To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Yellow Pages (TSE:Y) looks great, so lets see what the trend can tell us.
Understanding 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. The formula for this calculation on Yellow Pages is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = CA$99m ÷ (CA$368m - CA$62m) (Based on the trailing twelve months to December 2020).
Thus, Yellow Pages has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
See our latest analysis for Yellow Pages
In the above chart we have measured Yellow Pages' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yellow Pages.
So How Is Yellow Pages' ROCE Trending?
Yellow Pages has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 174% over the trailing five years. 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, Yellow Pages appears to been achieving more with less, since the business is using 79% less capital to run its operation. Yellow Pages may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Key Takeaway
From what we've seen above, Yellow Pages has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 38% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing to note, we've identified 2 warning signs with Yellow Pages and understanding them should be part of your investment process.
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.
This article by Simply Wall St is general in nature. 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.
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