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How Do AutoZone’s Key Ratios Look ahead of Its 1Q17 Earnings?

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AutoZone’s 1Q17 earnings

So far in this series, we have covered analysts’ estimates for AutoZone’s first quarter earnings, revenues, and margins. These estimates are suggesting the company could report positive year-over-year growth on all fronts in 1Q17. While the company’s revenues could improve due to higher domestic sales and expansion in international business, its margins also could expand due to higher retail sales. Now, let’s take a quick look at some of AutoZone’s other key ratios.

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Net debt to EBITDA

At the end of the most recently reported quarter, AutoZone’s net-debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio stood at 5.97x. In the last two quarters, this ratio has improved significantly. At the end of 4Q16, the company’s total debt stood at $4.9 billion, up from $4.6 billion in the corresponding quarter of the previous year.

AutoZone’s latest net-debt-to-EBITDA ratio was much higher than of peer Advanced Auto Parts’ (AAP) 3.92x. High debt levels increase the risk profile of a company because debt is a contractual obligation that a company must fulfill regardless of market conditions. Therefore, it’s important for investors to pay attention to a company’s leverage position.

Cash conversion cycle ratio

In terms of the cash conversion cycle ratio, AutoZone stands much ahead of its direct competitor AAP. At the end of the most recently reported quarters, AZO’s and AAP’s cash conversion cycle ratios stood at -20.4 and 103.8 days, respectively.

This implies that AutoZone receives the cash much earlier than it has to pay suppliers and other parties. The cash conversion cycle also highly depends on efficiently managing the inventory of a company.

Note that in the auto industry, Ferrari’s (RACE) cash conversion cycle is in the negative as well. This means Ferrari also receives the cash in much earlier than it has to pay suppliers. In contrast, other mainstream automakers (XLY) including General Motors (GM), Ford (F), and Fiat Chrysler (FCAU) have a high cash cycle ratio.

Continue to the next part where we’ll find out what analysts are recommending for AutoZone’s stock ahead of its 1Q17 earnings report.

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