Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 ran our eye over Yum! Brands' (NYSE:YUM) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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)

0.48 = US$2.4b ÷ (US$6.2b - US$1.2b) (Based on the trailing twelve months to March 2024).

So, Yum! Brands has an ROCE of 48%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

Above you can see how the current ROCE for Yum! Brands 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 analyst report for Yum! Brands .

What Does the ROCE Trend For Yum! Brands Tell Us?

Yum! Brands deserves to be commended in regards to it's returns. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 48%. Now considering ROCE is an attractive 48%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line

In summary, we're delighted to see that Yum! Brands has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 29% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Yum! Brands is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a final note, we found 4 warning signs for Yum! Brands (2 are potentially serious) you should be aware of.

Yum! Brands is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

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