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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Yellow Cake (LON:YCA) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)
0.098 = US$176m ÷ (US$1.8b - US$3.5m) (Based on the trailing twelve months to September 2024).
Thus, Yellow Cake has an ROCE of 9.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.6%.
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 analyst report for Yellow Cake .
What Does the ROCE Trend For Yellow Cake Tell Us?
Yellow Cake has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.8% on its capital. Not only that, but the company is utilizing 605% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Yellow Cake's ROCE
In summary, it's great to see that Yellow Cake has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 138% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.