Why The 24% Return On Capital At Alphabet (NASDAQ:GOOGL) Should Have Your Attention

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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)?

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. To calculate this metric for Alphabet, this is the formula:

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

0.24 = US$72b ÷ (US$369b - US$69b) (Based on the trailing twelve months to March 2023).

Thus, Alphabet has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 8.3%.

Check out our latest analysis for Alphabet

In the above chart we have measured Alphabet's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Alphabet.

How Are Returns Trending?

Investors would be pleased with what's happening at Alphabet. The data shows that returns on capital have increased substantially over the last five years to 24%. 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 66%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

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. Since the stock has returned a staggering 118% to shareholders over the last five years, it looks like investors are recognizing these changes. 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 want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

What are the risks and opportunities for Alphabet?

NasdaqGS:GOOGL

Alphabet

Alphabet Inc. offers various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America.Show more

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Rewards

• Trading at 32.8% below our estimate of its fair value

• Earnings are forecast to grow 13.19% per year

Risks

No risks detected for GOOGL from our risks checks.

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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.