What are the early trends to look for to identify a stock that could multiply in value over the long term? Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. Ergo, when we looked at ROCE trends at Auto area (NYSE:AZO), we liked what we saw.
What is return on capital employed (ROCE)?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. Analysts use this formula to calculate it for AutoZone:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.49 = $3.3 billion ÷ ($15 billion – $8.6 billion) (Based on the last twelve months to August 2022).
Therefore, AutoZone has a ROCE of 49%. In absolute terms, that’s an excellent return and even better than the specialty retail industry average of 18%.
Check out our latest analysis for AutoZone
Above, you can see how AutoZone’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you want to see what analysts predict for the future, you should check out our free report for AutoZone.
The ROCE trend
In terms of AutoZone’s ROCE history, that’s pretty impressive. The company has consistently gained 49% over the past five years and the capital employed within the company has increased by 49% over this period. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. You will see this when you look at well-run businesses or favorable business models.
Moreover, AutoZone’s current liabilities are still quite high at 56% of total assets. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Ideally, we would like this to decrease, as this would mean fewer risky bonds.
What we can learn from AutoZone’s ROCE
In summary, we are pleased to see that AutoZone has compounded returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable return of 289% for those who have held it over the past five years. So while investors seem to recognize these promising trends, we still think the stock warrants further research.
AutoZone has some risks, we noticed 2 warning signs (and 1 which is a little worrying) that we think you should know about.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating 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 be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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