Returns On Capital Are A Standout For AutoNation (NYSE:AN)
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of AutoNation (NYSE:AN) looks great, so lets see what the trend can tell us.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for AutoNation:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$1.7b ÷ (US$12b - US$5.6b) (Based on the trailing twelve months to December 2023).
So, AutoNation has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
See our latest analysis for AutoNation
In the above chart we have measured AutoNation's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for AutoNation .
What Does the ROCE Trend For AutoNation Tell Us?
The trends we've noticed at AutoNation are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 28% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a side note, AutoNation's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On AutoNation's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what AutoNation has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for AutoNation (of which 2 shouldn't be ignored!) that you should know about.
AutoNation is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
