The Returns On Capital At Alibaba Group Holding (NYSE:BABA) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Alibaba Group Holding (NYSE:BABA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.075 = CN¥103b ÷ (CN¥1.8t - CN¥385b) (Based on the trailing twelve months to March 2023).

Thus, Alibaba Group Holding has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 11%.

View our latest analysis for Alibaba Group Holding

In the above chart we have measured Alibaba Group Holding'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 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. To be more specific, ROCE has fallen from 12% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Alibaba Group Holding's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 50% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you're still interested in Alibaba Group Holding it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Alibaba Group Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.