Advance Auto Parts (NYSE:AAP) Might Be Having Difficulty Using Its Capital Effectively

What patterns should we be searching for if we want to find stocks that will rise in value over time?
We’ll look for two things: a demonstrated increase in return on capital employed (ROCE) and an expanding base of capital employed.

Simply put, these firms are compounding machines, which implies they are actively reinvesting their income at ever-increasing rates of return.
In light of this, we weren’t overly enthusiastic about Advance Auto Parts’ (NYSE:AAP) ROCE pattern.

What is R.O.C.E. (Return On Capital Employed)?

To be specific, ROCE is a formula for calculating how much pre-tax income (in percentage terms) a business receives on the money it spends in its operations.
This is the formula for calculating this metric for Advance Auto Parts:

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

(US$12 billion – US$4.7 billion) = 0.11 = US$800 million
(Based on the twelve-month cycle ending in January 2021.)

As a result, Advance Auto Parts has a ROCE of 11%.
That’s a typical return on capital, and it’s close to the 13% produced by the Specialty Retail sector.

You can see how Advance Auto Parts’ current ROCE compares to its previous returns on capital in the chart above, but there’s just so much you can learn from the past.
You can get free access to the forecasts from the analysts covering Advance Auto Parts by clicking here.

So, what’s the state of Advance Auto Parts’ ROCE?

On the surface, Advance Auto Parts’ ROCE pattern does not inspire trust.
Returns on capital were 19 percent about five years ago, but have since dropped to 11 percent.
However, in the last year, the organization has increased its capital expenditures without a corresponding increase in revenue, suggesting that these investments are longer-term bets.

It can take some time for the company to see a difference in earnings as a result of these investments.

On a side note, Advance Auto Parts’ current liabilities, at 40% of total assets, are still very high.
This essentially means that suppliers (or short-term creditors) are financing a substantial portion of the business; be mindful, however, that this may add some risk.
Although this isn’t always a negative thing, having a lower ratio can be advantageous.

The ROCE of Advance Auto Parts: The Bottom Line

To summarize, we discovered that Advance Auto Parts is reinvesting in the market, but that profits are declining.

And, given that the stock has returned just 21% to shareholders over the last five years, you might say that they’re well aware of the negative trends.
As a consequence, if you’re looking for a multi-bagger, you can consider other choices.

Though Advance Auto Parts doesn’t stand out in this regard, it’s still worth checking to see if it’s selling at a good price.
You will find out with our platform’s FREE intrinsic value calculation.

Check out this free list of companies with strong balance sheets and high returns on equity if you’re looking for a good company with good earnings.

Simply Wall St’s article is of a general kind.
It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial condition.

Our goal is to provide you with long-term, oriented research based on fundamental data.
Please keep in mind that our research does not take into account recent price-sensitive company announcements or qualitative data.
Simply put, none of the stocks listed are held by Wall Street.

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