Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Yellow Pages' (TSE:Y) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for Yellow Pages, this is the formula:

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

0.47 = CA$74m ÷ (CA$207m - CA$49m) (Based on the trailing twelve months to March 2023).

Therefore, Yellow Pages has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 7.8%.

View our latest analysis for Yellow Pages  roce

Above you can see how the current ROCE for Yellow Pages 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 freereport for Yellow Pages.

What The Trend Of ROCE Can Tell Us

Yellow Pages has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 144%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 61% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Our Take On Yellow Pages' ROCE

In a nutshell, we're pleased to see that Yellow Pages has been able to generate higher returns from less capital. Since the stock has only returned 39% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

One final note, you should learn about the  2 warning signs  we've spotted with Yellow Pages (including 1 which is a bit concerning) .

If you'd like to see other companies earning high returns, check out our freelist of companies earning high returns with solid balance sheets 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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here