Alphabet (NASDAQ:GOOGL) Is Very Good At Capital Allocation

By
Simply Wall St
Published
May 18, 2022
NasdaqGS:GOOGL
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Alphabet (NASDAQ:GOOGL) looks great, so lets see what the trend can tell us.

What is 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)

0.28 = US$82b ÷ (US$357b - US$62b) (Based on the trailing twelve months to March 2022).

Thus, Alphabet has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.

Check out our latest analysis for Alphabet

roce
NasdaqGS:GOOGL Return on Capital Employed May 18th 2022

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

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 28%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 87%. So we're very much inspired by what we're seeing at Alphabet thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Alphabet has. And a remarkable 140% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

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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