Akamai Technologies (NASDAQ:AKAM) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Akamai Technologies' (NASDAQ:AKAM) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Akamai Technologies, this is the formula:

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

0.10 = US$754m ÷ (US$8.1b - US$753m) (Based on the trailing twelve months to September 2022).

Thus, Akamai Technologies has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 12%.

See our latest analysis for Akamai Technologies

In the above chart we have measured Akamai Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Akamai Technologies' ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 80% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Akamai Technologies' ROCE

To sum it up, Akamai Technologies has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 33% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Akamai Technologies is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a separate note, we've found 1 warning sign for Akamai Technologies you'll probably want to know about.

While Akamai Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.