If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for AutoZone, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.48 = US$3.6b ÷ (US$16b – US$8.8b) (Based on the trailing twelve months to November 2023).
Thus, AutoZone has an ROCE of 48%. That’s a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
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 to see what analysts are forecasting going forward, you should check out our free report for AutoZone.
What The Trend Of ROCE Can Tell Us
In terms of AutoZone’s history of ROCE, it’s quite impressive. Over the past five years, ROCE has remained relatively flat at around 48% and the business has deployed 72% more capital into its operations. 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 54%. 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 Key Takeaway
In short, we’d argue AutoZone has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 210% return to those who’ve held 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.
AutoZone does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.
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.
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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.
