Yahoo Finance Returns on Capital Paint A Bright Future For Yellow Cake (LON:YCA)
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of Yellow Cake (LON:YCA) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Yellow Cake, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$178m ÷ (US$683m - US$8.1m) (Based on the trailing twelve months to September 2021).
Thus, Yellow Cake has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
View our latest analysis for Yellow Cake
Above you can see how the current ROCE for Yellow Cake 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 report on analyst forecasts for the company.
The Trend Of ROCE
We're delighted to see that Yellow Cake is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses two years ago, but now it's earning 26% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Yellow Cake is utilizing 165% more capital than it was two years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line On Yellow Cake's ROCE
To the delight of most shareholders, Yellow Cake has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 81% return over the last three years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know more about Yellow Cake, we've spotted 3 warning signs, and 2 of them don't sit too well with us.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
