Yahoo Finance Are Investors Overlooking Returns On Capital At O'Reilly Automotive (NASDAQ:ORLY)?
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of O'Reilly Automotive (NASDAQ:ORLY) looks attractive right now, so lets see what the trend of returns can tell us.
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. To calculate this metric for O'Reilly Automotive, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = US$2.4b ÷ (US$12b - US$5.3b) (Based on the trailing twelve months to December 2020).
Thus, O'Reilly Automotive has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 12%.
Check out our latest analysis for O'Reilly Automotive
In the above chart we have measured O'Reilly Automotive's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering O'Reilly Automotive here for free.
What Can We Tell From O'Reilly Automotive's ROCE Trend?
We'd be pretty happy with returns on capital like O'Reilly Automotive. Over the past five years, ROCE has remained relatively flat at around 38% and the business has deployed 74% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
Another thing to note, O'Reilly Automotive has a high ratio of current liabilities to total assets of 45%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
In short, we'd argue O'Reilly Automotive has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 67% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Like most companies, O'Reilly Automotive does come with some risks, and we've found 2 warning signs that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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. 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.
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