Yahoo Finance What We Make Of Yellow Cake's (LON:YCA) Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Yellow Cake (LON:YCA) and its trend of ROCE, we really liked what we saw.
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. 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)
0.13 = US$37m ÷ (US$284m - US$1.4m) (Based on the trailing twelve months to September 2020).
Thus, Yellow Cake has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Trade Distributors industry.
See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Yellow Cake.
What Can We Tell From Yellow Cake's ROCE Trend?
Shareholders will be relieved that Yellow Cake has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 13% on its capital. While returns have increased, the amount of capital employed by Yellow Cake has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.
The Bottom Line
To bring it all together, Yellow Cake has done well to increase the returns it's generating from its capital employed. And with a respectable 47% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we found 3 warning signs for Yellow Cake (1 is concerning) you should be aware of.
While Yellow Cake isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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