Does Avnet Inc (NASDAQ:AVT)'s Capital Return Make The Cut?

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Avnet Inc (NASDAQ:AVT) stock.

Purchasing Avnet gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to AVT’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Avnet’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

View our latest analysis for Avnet

What is Return on Capital Employed (ROCE)?

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could've received, which is dependent on the gap between the return on capital you could've achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We'll look at Avnet’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:

AVT’s 9.0% ROCE means that for every $100 you invest, the company creates $9. Comparing this to a healthy 15% benchmark shows Avnet is currently unable to return a satisfactory amount to owners for the use of their capital, which isn't good for investors who have forgone other potentially solid companies.

What is causing this?

AVT doesn't return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, AVT’s ROCE was 15%, which means the company's capital returns have worsened. Over the same period, EBT went from US$761m to US$480m and capital employed has increased due to a smaller amount of current liabilities used (meaning the company has used less borrowed money than shareholder capital to produce earnings) , which means the company's ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

Avnet’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don't forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate AVT or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for AVT’s future growth? Take a look at our free research report of analyst consensus for AVT’s outlook.
2. Valuation: What is AVT worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether AVT is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St 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.