Stock Analysis

Some Investors May Be Worried About Alibaba Group Holding's (NYSE:BABA) Returns On Capital

  •  Updated
NYSE:BABA
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Alibaba Group Holding (NYSE:BABA) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Alibaba Group Holding is:

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

0.068 = CN¥91b ÷ (CN¥1.7t - CN¥376b) (Based on the trailing twelve months to June 2022).

So, Alibaba Group Holding has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 14%.

View our latest analysis for Alibaba Group Holding

roce
NYSE:BABA Return on Capital Employed September 9th 2022

Above you can see how the current ROCE for Alibaba Group Holding 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 Alibaba Group Holding here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Alibaba Group Holding doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 6.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Alibaba Group Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 49% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Alibaba Group Holding, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

What are the risks and opportunities for Alibaba Group Holding?

Alibaba Group Holding Limited, through its subsidiaries, provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People's Republic of China and internationally.

View Full Analysis

Rewards

  • Trading at 23% below our estimate of its fair value

  • Earnings are forecast to grow 29.19% per year

Risks

  • Profit margins (1.6%) are lower than last year (15.3%)

  • Large one-off items impacting financial results

View all Risks and Rewards

Share Price

Market Cap

1Y Return

View Company Report

Further research on
Alibaba Group Holding

ValuationFinancial HealthInsider TradingManagement Team

About NYSE:BABA

Alibaba Group Holding

Alibaba Group Holding Limited, through its subsidiaries, provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People's Republic of China and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth4
Past Performance1
Financial Health6
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet with reasonable growth potential.