Slowing Return Rates on Amazon.com (NASDAQ:AMZN) Leave Little Room for Enthusiasm

If we want to find a stock that has the potential to grow over the long term, what are the underlying trends we should look for? In a perfect world, we’d like to see a company invest more capital into its business, and ideally the returns on that capital increase as well. This shows us that it is a capitalization machine, capable of continually reinvesting its profits into the business and generating higher returns. With this in mind, the ROCE of Amazon.com (NASDAQ:AMZN) looks decent at the moment, so let’s see what the yield trend can tell us.

Return on capital employed (ROCE): what is it?

If you’ve never worked with ROCE before, it measures the “return” (pre-tax profit) that a company generates from the capital employed in its business. Analysts use this formula to calculate it for Amazon.com:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.13 = US$47 billion ÷ (US$531 billion – US$153 billion) (Based on the last twelve months to March 2024).

So, Amazon.com has an ROCE of 13%. In absolute terms, this is a fairly normal return, and somewhat close to the multiline retail industry average of 11%.

Check out our latest analysis for Amazon.com

Above, you can see how Amazon.com’s current ROCE compares to its past returns on capital, but there’s only so much you can say about the past. If you want, you can check out the forecasts from analysts covering Amazon.com for free.

The ROCE trend

Although current capital returns are okay, they haven’t changed much. The company has consistently gained 13% over the past five years and capital employed within the company has increased by 230% during this period. However, given that an ROCE of 13% is moderate, it’s good to see that a company can continue to reinvest at these decent rates of return. Over long periods of time, such returns may not be very attractive, but if consistent, they can pay off in terms of share price returns.

The essential

In short, Amazon.com has simply reinvested its capital consistently, at decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 104% return compared to those who have held it over the past five years. So while investors can explain the positive underlying trends, we still think this stock deserves a closer look.

While Amazon.com doesn’t shine too much in this regard, it’s still worth seeing if the company is trading at attractive prices. You can find out with our FREE Intrinsic Value Estimate for AMZN on our platform.

Although Amazon.com doesn’t generate the highest return, take a look at this free list of companies that earn high returns on equity with strong balance sheets.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.