Investing legend Peter Lynch said, "If you stay half-alert, you can pick the spectacular performers from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them."  

In this day of instantaneous information chances are Wall Street is already on top of any company you may come across. However, you can still utilize your local shopping center or area retailers as a starting point for doing investment research. Many small to mid-size towns play host to automotive retailing chains such as Advance Auto Parts (NYSE:AAP), Autozone (NYSE:AZO), and O'Reilly Automotive (NASDAQ:ORLY). Of course, Lynch never intended for investors to invest in companies blindly. Let's take a look under the proverbial hood of these companies to see if they have the muscle to grow revenue and cash flow and retain that cash on their balance sheets. It also pays to check out their debt loads since interest can choke out profitability and cash flow.

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Advancing parts
Advance Auto Parts operates under two segments Advance Auto Parts that caters to individuals and Autopart International that caters to the commercial market, according its latest 10-K. As of the end of last year Advance Auto Parts operated 3,832 stores in the retail customer segment and 217 stores in its commercial segment. In 2013, Advance Auto Parts increased its revenue and net income 5% and 1% respectively.  Its free cash flow declined 17% during that time.  Advance Auto Parts saw its comparable (established) store sales decline 1.5% during 2013.  

Most of the increase in revenue and net income came from the opening of 151 new stores and the acquisition of BWP, a commercial parts seller.  Advance Auto Parts has focused most of its investment on the commercial segment due to "favorable market dynamics."   Acquisition costs, store opening costs, and an increase in interest expense stemming from increased debt served as a drag on net income expansion. Increased inventory due to store expansion contributed the most to the free cash flow decrease. 

On Advance Auto Parts' balance sheet, cash came in at 73% of stockholder's equity. Advance Auto Parts increased its long-term debt in 2013 raising its long-term debt to equity ratio from 50% to 69%. As a general rule, It's preferable for investors to look for companies with long-term debt to equity ratios of less than 50%. Last year Advance Auto Parts paid out 5% of its free cash flow in dividends.  Currently the company pays shareholders $0.24 per share per year yielding 0.2%

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In the Autozone
Autozone caters to both individual and commercial markets under one umbrella.  As of the most recent quarter, Autozone operated 5,242 stores in the United States, Mexico, and Brazil.  Autozone grew its revenue, net income, and free cash flow 6%, 8%, and 2% respectively so far in FY 2014. Comparable domestic store increases of 2.5% contributed to revenue gains during that time. Higher gross margins and lower interest expense stemming from lower borrowing interest rates helped contribute to gains in net income.  Lower capital expenditures contributed to Autozone's gain in free cash flow so far this year. 

Autozone's balance sheet is so loaded with debt that its liabilities exceed its assets creating a stockholder's deficit. Autozone's cash balance came in at $140 million, a minuscule balance compared to its long-term debt of $4.1 billion.  However, despite its heavy debt load operating income still exceeds interest expense by a comfortable nine times.  The company currently pays no dividend. 

O'Reilly operates on all cylinders
O'Reilly also sells auto parts to individual and commercial customers.
 The company ran over 4,200 stores in the United States as of the most recent quarter. O'Reilly experienced robust expansion in fundamentals in its most recent quarter with sales, net income, and free cash flow increasing 9%, 13%,  and 72% respectively during that time. New stores and increased sales at established stores contributed to the robust top line expansion and filtered down to net income.  Increased net income and favorable timing of accruals such as accounts payable and accounts receivable contributed to the increase in free cash flow.  O'Reilly's balance sheet shows cash and long-term debt coming in at 24% and 65%, respectively. O'Reilly also increased its long-term debt versus the same time last year. O'Reilly's long-term debt to equity ratio came in at 53% in the first quarter of 2012. 

Foolish takeaway
Economic recession served as a catalyst for consumers tightening their belts and driving cars for an extended period of time contributing to the growth of these companies. If the economy picks up it may actually hurt automotive parts retailers as the consumer flocks to newer cars. 

However, in any possible downturn your best bet lies with the company with the best balance sheet. The winner in that department is Advance Auto Parts. O'Reilly' serves as the runner up followed by Autozone with its minuscule cash balance overshadowed by its huge debt. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.