If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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, we’ve noticed some promising trends at Amazon.com (NASDAQ:AMZN) so let’s look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Amazon.com, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = US$20b ÷ (US$282b – US$102b) (Based on the trailing twelve months to September 2020).
Therefore, Amazon.com has an ROCE of 11%. In absolute terms, that’s a satisfactory return, but compared to the Online Retail industry average of 8.3% it’s much better.
In the above chart we have measured Amazon.com’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 Amazon.com.
So How Is Amazon.com’s ROCE Trending?
We like the trends that we’re seeing from Amazon.com. Over the last five years, returns on capital employed have risen substantially to 11%. 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 509%. 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.
In another part of our analysis, we noticed that the company’s ratio of current liabilities to total assets decreased to 36%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business’ underlying economics, which is great to see.
Our Take On Amazon.com’s ROCE
In summary, it’s great to see that Amazon.com 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. Since the stock has returned a staggering 362% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if Amazon.com can keep these trends up, it could have a bright future ahead.
Amazon.com does have some risks though, and we’ve spotted 1 warning sign for Amazon.com that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article by Simply Wall St is general in nature. 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.