- United States
- General Merchanise and Department Stores
Returns On Capital At Amazon.com (NASDAQ:AMZN) Paint A Concerning Picture
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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Amazon.com (NASDAQ:AMZN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Amazon.com, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = US$13b ÷ (US$464b - US$148b) (Based on the trailing twelve months to March 2023).
Thus, Amazon.com has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 9.5%.
Check out our latest analysis for Amazon.com
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.
SWOT Analysis for Amazon.com
- Debt is not viewed as a risk.
- Earnings declined over the past year.
- Annual earnings are forecast to grow faster than the American market.
- Good value based on P/S ratio and estimated fair value.
- Revenue is forecast to grow slower than 20% per year.
How Are Returns Trending?
On the surface, the trend of ROCE at Amazon.com doesn't inspire confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 4.2%. However it looks like Amazon.com might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Amazon.com's ROCE
To conclude, we've found that Amazon.com is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 43% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a separate note, we've found 2 warning signs for Amazon.com you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.
Amazon.com, Inc. engages in the retail sale of consumer products and subscriptions through online and physical stores in North America and internationally.
Reasonable growth potential with adequate balance sheet.