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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at Yum! Brands (NYSE:YUM), we liked what we saw.
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 Yum! Brands, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.46 = US$2.1b ÷ (US$5.8b - US$1.3b) (Based on the trailing twelve months to March 2022).
Thus, Yum! Brands has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 9.9%.
In the above chart we have measured Yum! Brands' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Yum! Brands here for free.
How Are Returns Trending?
We'd be pretty happy with returns on capital like Yum! Brands. The company has consistently earned 46% for the last five years, and the capital employed within the business has risen 25% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
What We Can Learn From Yum! Brands' ROCE
Yum! Brands has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has followed suit returning a meaningful 71% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Yum! Brands does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.