If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Alphabet (NASDAQ:GOOGL) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Alphabet:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.30 = US$102b ÷ (US$415b – US$78b) (Based on the trailing twelve months to June 2024).
Therefore, Alphabet has an ROCE of 30%. In absolute terms that’s a great return and it’s even better than the Interactive Media and Services industry average of 6.6%.
View our latest analysis for Alphabet
Above you can see how the current ROCE for Alphabet compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Alphabet for free.
So How Is Alphabet’s ROCE Trending?
Alphabet is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% more capital is being employed now too. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
The Bottom Line
To sum it up, Alphabet has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 165% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Alphabet looks impressive, no company is worth an infinite price. The intrinsic value infographic for GOOGL helps visualize whether it is currently trading for a fair price.
Alphabet 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.
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