Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over AutoZone’s (NYSE:AZO) trend of ROCE, we really liked what we saw.
Understanding 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 AutoZone:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.46 = US$3.7b ÷ (US$17b – US$8.8b) (Based on the trailing twelve months to February 2024).
So, AutoZone has an ROCE of 46%. 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 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 to see what analysts are forecasting going forward, you should check out our free analyst report for AutoZone .
The Trend Of ROCE
In terms of AutoZone’s history of ROCE, it’s quite impressive. The company has employed 80% more capital in the last five years, and the returns on that capital have remained stable at 46%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. If AutoZone can keep this up, we’d be very optimistic about its future.
Another thing to note, AutoZone has a high ratio of current liabilities to total assets of 52%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On AutoZone’s ROCE
In summary, we’re delighted to see that AutoZone has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 220% 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.
On a final note, we found 3 warning signs for AutoZone (1 makes us a bit uncomfortable) you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
