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AppLovin (NASDAQ:APP) Will Be Hoping To Turn Its Returns On Capital Around

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at AppLovin (NASDAQ:APP) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for AppLovin:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0076 = US$41m ÷ (US$6.2b - US$785m) (Based on the trailing twelve months to March 2022).

Therefore, AppLovin has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Software industry average of 9.3%.

See our latest analysis for AppLovin

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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 here for free.

What Does the ROCE Trend For AppLovin Tell Us?

When we looked at the ROCE trend at AppLovin, we didn't gain much confidence. Around three years ago the returns on capital were 40%, but since then they've fallen to 0.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On AppLovin's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for AppLovin. These growth trends haven't led to growth returns though, since the stock has fallen 45% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 3 warning signs for AppLovin you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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