If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 looked at the ROCE trend of Alphabet (NASDAQ:GOOG.L) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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)
0.22 = US$63b ÷ (US$335b - US$56b) (Based on the trailing twelve months to June 2021).
So, Alphabet has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 8.1%.
In the above chart we have measured Alphabet's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Alphabet here for free.
How Are Returns Trending?
The trends we've noticed at Alphabet are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 104% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On Alphabet's ROCE
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 234% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Alphabet can keep these trends up, it could have a bright future ahead.
While Alphabet looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether GOOG.L is currently trading for a fair price.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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