Is Yellow Cake (LON:YCA) Headed For Trouble?

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Yellow Cake (LON:YCA), so let's see why.

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. Analysts use this formula to calculate it for Yellow Cake:

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

0.048 = US$13m ÷ (US$270m - US$392k) (Based on the trailing twelve months to March 2020).

Therefore, Yellow Cake has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 12%.

View our latest analysis for Yellow Cake

roce

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 report on analyst forecasts for the company.

So How Is Yellow Cake's ROCE Trending?

There is reason to be cautious about Yellow Cake, given the returns are trending downwards. To be more specific, the ROCE was 12% one year ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Yellow Cake becoming one if things continue as they have.

The Bottom Line On Yellow Cake's ROCE

In summary, it's unfortunate that Yellow Cake is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 6.1% over the last year, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Yellow Cake that we think you should be aware of.

While Yellow Cake isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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.

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