If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Yelp's (NYSE:YELP) returns on capital, so let's have a look.
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 Yelp, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$128m ÷ (US$993m - US$191m) (Based on the trailing twelve months to March 2024).
So, Yelp has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Interactive Media and Services industry.
In the above chart we have measured Yelp's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Yelp .
What Does the ROCE Trend For Yelp Tell Us?
We're pretty happy with how the ROCE has been trending at Yelp. The data shows that returns on capital have increased by 617% over the trailing five years. The company is now earning US$0.2 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 34% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
In Conclusion...
In a nutshell, we're pleased to see that Yelp has been able to generate higher returns from less capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 12% to shareholders. So with that in mind, we think the stock deserves further research.
On a final note, we've found 1 warning sign for Yelp that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.