Shareholders Are Optimistic That AutoZone (NYSE:AZO) Will Multiply In Value
What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at AutoZone (NYSE:AZO), we liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)
0.47 = US$3.3b ÷ (US$16b - US$8.6b) (Based on the trailing twelve months to February 2023).
Thus, AutoZone has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 13%.
Check out our latest analysis for AutoZone
Above you can see how the current ROCE for AutoZone 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 AutoZone here for free.
What The Trend Of ROCE Can Tell Us
AutoZone deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 47% and the business has deployed 56% more capital into its operations. Now considering ROCE is an attractive 47%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
On a side note, AutoZone's current liabilities are still rather high at 55% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On AutoZone's ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And long term investors would be thrilled with the 310% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
One more thing: We've identified 2 warning signs with AutoZone (at least 1 which is concerning) , and understanding them would certainly be useful.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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