To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in AppLovin’s (NASDAQ:APP) returns on capital, so let’s have a look.
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on AppLovin is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.33 = US$1.5b ÷ (US$5.4b – US$780m) (Based on the trailing twelve months to September 2024).
So, AppLovin has an ROCE of 33%. In absolute terms that’s a great return and it’s even better than the Software industry average of 8.1%.
View our latest analysis for AppLovin
Above you can see how the current ROCE for AppLovin compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering AppLovin for free.
Investors would be pleased with what’s happening at AppLovin. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 33%. 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 464%. So we’re very much inspired by what we’re seeing at AppLovin thanks to its ability to profitably reinvest capital.
All in all, it’s terrific to see that AppLovin is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 496% to shareholders over the last three years, it looks like investors are recognizing these changes. 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.
AppLovin does have some risks though, and we’ve spotted 3 warning signs for AppLovin that you might be interested in.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
