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If you want to spot potential multibaggers, there are often underlying trends that can provide clues. In an ideal world, companies would invest more capital in their operations, and ideally the return on that capital would also increase. After all, this shows that this is a business that is increasing its profitability and reinvesting its profits. Therefore, when we looked at the trends in ROCE; 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 annual pre-tax profit (return) on the capital employed in the business. To calculate this metric for AutoZone, use the following formula:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.48 = USD 3.6 billion ÷ (USD 16 billion – USD 8.8 billion) (Based on the previous 12 months to November 2023).
therefore, AutoZone’s ROCE is 48%. That’s an impressive return, and not only that, but it’s higher than the average 12% earned by companies in similar industries.
Check out our latest analysis for AutoZone.
Above you can see how AutoZone’s current ROCE compares to its previous return on equity, but the past can only tell you so much. If you want to know what analysts are predicting for the future, check out this article. free AutoZone Reports.
What ROCE trends tell us
When it comes to AutoZone’s ROCE history, it’s quite impressive. Over the past five years, ROCE has remained relatively flat at around 48%, with 72% more capital invested in operating the business. A return like this would be the envy of most companies, and it’s even better considering it has been repeatedly reinvested at such rates. If AutoZone can keep this up, we’ll be very optimistic about its future.
Another thing to note is that AutoZone’s current liabilities to total assets ratio is high at 54%. Note that this effectively means that your suppliers (or short-term creditors) are financing a large part of your business, so this can introduce some elements of risk. This is not necessarily a bad thing, but a lower ratio can be advantageous.
Important points
In short, AutoZone has the makings of a multibagger, as it has been able to compound its capital at very profitable rates of return. On top of that, the stock has returned an impressive 210% to shareholders over the past five years. As such, we believe the stock’s strong fundamentals make it worthy of further research, even if the stock is now more “expensive” than it was previously.
I noticed some risks with AutoZone 3 warning signs (and two potentially serious ones) that I think you should know about.
If you want to find more stocks with high returns, check this out. free This is a list of stocks with strong balance sheets and high return on equity.
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our 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 using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
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