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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)?
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. Analysts use this formula to calculate it for Alphabet:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = US$109b ÷ (US$430b - US$81b) (Based on the trailing twelve months to September 2024).
Therefore, Alphabet has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 6.8%.
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 analyst report for Alphabet .
So How Is Alphabet's ROCE 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 31%. The amount of capital employed has increased too, by 56%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
In summary, it's great to see that Alphabet can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for GOOGL that compares the share price and estimated value.