Alphabet (NASDAQ:GOOGL) Knows How To Allocate Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at the ROCE trend of Alphabet (NASDAQ:GOOGL) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.29 = US$97b ÷ (US$407b - US$77b) (Based on the trailing twelve months to March 2024).

Therefore, Alphabet has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 6.4%.

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're interested, you can view the analysts predictions in our free analyst report for Alphabet .

What Can We Tell From Alphabet's ROCE Trend?

The trends we've noticed at Alphabet are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 29%. The amount of capital employed has increased too, by 57%. So we're very much inspired by what we're seeing at Alphabet thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, Alphabet has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 195% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

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.

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.

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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.