AutoZone, Inc. (NYSE:AZO) Is Employing Capital Very Effectively

Simply Wall St
·4 min read

Today we are going to look at AutoZone, Inc. (NYSE:AZO) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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

Or for AutoZone:

0.33 = US$2.2b ÷ (US$13b - US$5.9b) (Based on the trailing twelve months to November 2019.)

So, AutoZone has an ROCE of 33%.

Check out our latest analysis for AutoZone

Does AutoZone Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, AutoZone's ROCE is meaningfully higher than the 11% average in the Specialty Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, AutoZone's ROCE is currently very good.

We can see that, AutoZone currently has an ROCE of 33%, less than the 53% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how AutoZone's ROCE compares to its industry. Click to see more on past growth.

NYSE:AZO Past Revenue and Net Income, February 28th 2020
NYSE:AZO Past Revenue and Net Income, February 28th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for AutoZone.

Do AutoZone's Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

AutoZone has current liabilities of US$5.9b and total assets of US$13b. As a result, its current liabilities are equal to approximately 46% of its total assets. A medium level of current liabilities boosts AutoZone's ROCE somewhat.

Our Take On AutoZone's ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. AutoZone looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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