Amazon.com's (NASDAQ:AMZN) is a company that has sustained impressive growth, which also resulted in a 4.7% return over the past year for shareholders. The solid 6.7% E.B.I.T. margins and 38% revenue growth in the last 12 months, depict a stable long term company for investors. Another marker of a great company is the amount of the returns it generates in relation to the capital it employs, this is a great leading indicator to future growth for investors and will be what we examine in our analysis.
There are many return measures, and looking at multiple measures that show a congruent picture is more informative than any one individual measure. Investors can look at Return on Equity, Return on Assets, Return on Capital Employed to get a fuller picture of the company's returns.
In this analysis, we will focus on the return on capital employed as a measure of bottom line returns, and the sales to capital as a measure of top line (revenue) returns. Both of these measures will show us the quality of management decisions and projects that Amazon has taken up over the years.
Sales to Capital
This measure shows us the amount of revenue returned to the company for every $1 dollar of invested capital, both by debt and equity investors.
We calculate sales to capital with the following formula:
Revenues TTM / (Average Book Value of Equity + Debt - Cash) = Sales to Capital
For Amazon, the Sales to Capital return is:
4.02 = US$443.3b / (US$93.6b + US$106.6b - US$89.8b)
This means that Amazon has an outstanding 4.02 or 402% Sales to Capital.
Practically, this means that Amazon is getting $4 revenues for every $1 invested in the company.
Amazon has made some pretty smart investments in the business, such as the AWS cloud services, the Alexa devices and most recently, Astro the home assistance and security robot.
The other measure we will look at is the Return on Capital Employed, which will give us a measure of bottom line returns.
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. 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)
0.12 = US$30b ÷ (US$360b - US$118b) (Based on the trailing twelve months to June 2021).
So, Amazon.com has an ROCE of 12%. By itself, that's a normal return on capital, and it's in line with the industry's average returns of 12%.
In the above chart we have measured Amazon.com's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. The company has employed 583% more capital in the last five years, and the returns on that capital have remained stable at 12%.
12% is a pretty standard return, and it provides some comfort knowing that Amazon.com has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, Amazon.com has done well to reduce current liabilities to 33% of total assets over the last five years. Effectively, suppliers now fund less of the business, which can lower some elements of risk.
Amazon has a well-rounded returns profile, including both revenue and net income returns to the overall debt and equity employed in the company. These measures indicate profitable projects undertaken by management in the past and a quality of decision-making that can sustain future growth.
While investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Amazon.com does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
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.
What are the risks and opportunities for Amazon.com?
Trading at 47.2% below our estimate of its fair value
Earnings are forecast to grow 44.41% per year
High level of non-cash earnings
Profit margins (2.3%) are lower than last year (5.7%)
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article 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.
Goran is an Equity Analyst and Writer at Simply Wall St over 4 years of experience in financial analysis and company research. Personally, Goran has over 4 years of experience in financial analysis and company research, where he previously worked in a seed-stage startup as a capital markets research analyst and product lead and developed a financial data platform for equity investors.