Did you know that there are certain financial metrics that can provide clues of a potential multi-bagger investment opportunity? One common strategy is to look for companies with increasing returns on capital employed (ROCE) alongside a growing amount of capital employed. These businesses act as compounding machines, continuously reinvesting their earnings at higher rates of return. However, upon closer inspection of the numbers, it seems that Amazon.com (NASDAQ:AMZN) may not have the potential to be a multi-bagger in the future. Let’s delve into the reasons behind this assessment.
What Is Return On Capital Employed (ROCE)?
For those unfamiliar with ROCE, it measures the pre-tax profits a company can generate from the capital employed in its Business. Using the formula to calculate it for Amazon.com:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities).
In this case, Amazon.com has an ROCE of 10%. While this is a fairly standard return, it is slightly below the Multiline Retail industry average of 12%.
Analyzing Amazon.com’s ROCE Trend
A look at Amazon.com’s ROCE trend reveals a decrease from 13% over the last five years. Despite an increase in revenue and assets employed, the drop in ROCE could be attributed to the company’s investment in growth initiatives. If the additional capital generates higher returns in the future, both the business and shareholders stand to benefit in the long term.
On a positive note, Amazon.com has managed to reduce its current liabilities to 31% of total assets, which may have contributed to the decrease in ROCE. By relying less on short-term creditors, the business has lowered some risk factors. However, this shift also indicates that Amazon.com is now funding more of its operations using its own resources, potentially impacting its efficiency in generating ROCE.
In Conclusion
Despite a decline in returns, Amazon.com’s growth trajectory and reinvestment in operations present a positive outlook for long-term investors. The stock has delivered a significant return of 101% to shareholders over the past five years, indicating potential for continued growth. While Amazon.com may not currently stand out in terms of ROCE, it’s worth evaluating if the company is trading at attractive prices. For a more in-depth analysis, check out our free intrinsic value estimation for AMZN on our platform.
If you prefer investing in solid companies, explore our free list of companies with strong balance sheets and high returns on equity. Share your feedback on this article or reach out to us directly with any concerns. Remember, this article by Simply Wall St aims to provide unbiased analysis based on historical data and analyst forecasts, not financial advice. Make informed decisions based on your objectives and financial situation.
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