We Think Alphabet (NASDAQ:GOOGL) Might Have The DNA Of A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Alphabet's (NASDAQ:GOOGL) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Alphabet:

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

0.25 = US$77b ÷ (US$383b - US$78b) (Based on the trailing twelve months to June 2023).

Thus, Alphabet has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 7.0% earned by companies in a similar industry.

See our latest analysis for Alphabet

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'd like, you can check out the forecasts from the analysts covering Alphabet here for free.

How Are Returns Trending?

We like the trends that we're seeing from Alphabet. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 68%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

All in all, it's terrific to see that Alphabet is reaping the rewards from prior investments and is growing its capital base. And a remarkable 116% 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.

While Alphabet looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether GOOGL is currently trading for a fair price.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

What are the risks and opportunities for Alphabet?

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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.