Stock Analysis

Amazon.com (NASDAQ:AMZN) Could Be Struggling To Allocate Capital

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NasdaqGS:AMZN
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Amazon.com (NASDAQ:AMZN) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Amazon.com is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.055 = US$15b ÷ (US$420b - US$140b) (Based on the trailing twelve months to June 2022).

Therefore, Amazon.com has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 13%.

View our latest analysis for Amazon.com

roce
NasdaqGS:AMZN Return on Capital Employed October 27th 2022

Above you can see how the current ROCE for Amazon.com 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 Amazon.com here for free.

The Trend Of ROCE

In terms of Amazon.com's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.3% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Amazon.com has decreased its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we've found that Amazon.com is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 110% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 2 warning signs we've spotted with Amazon.com (including 1 which can't be ignored) .

While Amazon.com isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Amazon.com is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:AMZN

Amazon.com

Amazon.com, Inc. engages in the retail sale of consumer products and subscriptions in North America and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth4
Past Performance1
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Reasonable growth potential with adequate balance sheet.