Investors Shouldn't Overlook The Favourable Returns On Capital At AutoZone (NYSE:AZO)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at AutoZone (NYSE:AZO), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on AutoZone is:

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

0.47 = US$3.4b ÷ (US$16b - US$8.5b) (Based on the trailing twelve months to May 2023).

Therefore, AutoZone has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 14%.

See our latest analysis for AutoZone

In the above chart we have measured AutoZone'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.

SWOT Analysis for AutoZone

What Can We Tell From AutoZone's ROCE Trend?

We'd be pretty happy with returns on capital like AutoZone. Over the past five years, ROCE has remained relatively flat at around 47% and the business has deployed 63% 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.

On a side note, AutoZone's current liabilities are still rather high at 54% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On AutoZone's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 259% 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.

One more thing: We've identified 2 warning signs with AutoZone (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.