U.S. markets closed
  • S&P Futures

    3,794.25
    -9.00 (-0.24%)
     
  • Dow Futures

    30,289.00
    -76.00 (-0.25%)
     
  • Nasdaq Futures

    11,614.50
    -26.25 (-0.23%)
     
  • Russell 2000 Futures

    1,773.40
    -8.10 (-0.45%)
     
  • Crude Oil

    86.62
    +0.10 (+0.12%)
     
  • Gold

    1,733.00
    +2.50 (+0.14%)
     
  • Silver

    21.06
    -0.04 (-0.18%)
     
  • EUR/USD

    0.9988
    +0.0002 (+0.02%)
     
  • 10-Yr Bond

    3.6170
    -0.0340 (-0.93%)
     
  • Vix

    29.07
    -1.03 (-3.42%)
     
  • GBP/USD

    1.1456
    -0.0018 (-0.16%)
     
  • USD/JPY

    143.6140
    -0.5850 (-0.41%)
     
  • BTC-USD

    20,312.59
    +655.71 (+3.34%)
     
  • CMC Crypto 200

    460.62
    +15.18 (+3.41%)
     
  • FTSE 100

    7,086.46
    +177.70 (+2.57%)
     
  • Nikkei 225

    26,992.21
    0.00 (0.00%)
     

Yellow (NASDAQ:YELL) Might Be Having Difficulty Using Its Capital Effectively

·2 min read

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Yellow (NASDAQ:YELL) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Yellow:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.051 = US$80m ÷ (US$2.4b - US$846m) (Based on the trailing twelve months to March 2022).

So, Yellow has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 14%.

Check out our latest analysis for Yellow

roce
roce

In the above chart we have measured Yellow's 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.

What Does the ROCE Trend For Yellow Tell Us?

When we looked at the ROCE trend at Yellow, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.1% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Yellow. And there could be an opportunity here if other metrics look good too, because the stock has declined 64% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 3 warning signs we've spotted with Yellow (including 1 which is potentially serious) .

While Yellow may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.