What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Alibaba Group Holding (NYSE:BABA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on Alibaba Group Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = CN¥127b ÷ (CN¥1.8t - CN¥449b) (Based on the trailing twelve months to December 2023).
Therefore, Alibaba Group Holding has an ROCE of 9.3%. On its own, that's a low figure but it's around the 11% average generated by the Multiline Retail industry.
In the above chart we have measured Alibaba Group Holding's 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 analyst report for Alibaba Group Holding .
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Alibaba Group Holding. The company has consistently earned 9.3% for the last five years, and the capital employed within the business has risen 93% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Alibaba Group Holding's ROCE
As we've seen above, Alibaba Group Holding's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 54% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you're still interested in Alibaba Group Holding it's worth checking out our FREE intrinsic value approximation for BABA to see if it's trading at an attractive price in other respects.
While Alibaba Group Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.