Advertisement
UK markets closed
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • CRUDE OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD FUTURES

    2,254.80
    +16.40 (+0.73%)
     
  • DOW

    39,807.37
    +47.29 (+0.12%)
     
  • Bitcoin GBP

    56,135.75
    +1,157.64 (+2.11%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • NASDAQ Composite

    16,379.46
    -20.06 (-0.12%)
     
  • UK FTSE All Share

    4,338.05
    +12.12 (+0.28%)
     

Here's What Adyen N.V.'s (AMS:ADYEN) ROCE Can Tell Us

Today we are going to look at Adyen N.V. (AMS:ADYEN) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

ADVERTISEMENT

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

Or for Adyen:

0.29 = €222m ÷ (€2.0b - €1.3b) (Based on the trailing twelve months to June 2019.)

So, Adyen has an ROCE of 29%.

See our latest analysis for Adyen

Does Adyen Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Adyen's ROCE appears to be substantially greater than the 13% average in the IT industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Adyen's ROCE is currently very good.

In our analysis, Adyen's ROCE appears to be 29%, compared to 3 years ago, when its ROCE was 20%. This makes us think the business might be improving. You can see in the image below how Adyen's ROCE compares to its industry. Click to see more on past growth.

ENXTAM:ADYEN Past Revenue and Net Income, November 6th 2019
ENXTAM:ADYEN Past Revenue and Net Income, November 6th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Adyen.

What Are Current Liabilities, And How Do They Affect Adyen's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Adyen has total liabilities of €1.3b and total assets of €2.0b. As a result, its current liabilities are equal to approximately 63% of its total assets. Adyen's high level of current liabilities boost the ROCE - but its ROCE is still impressive.

The Bottom Line On Adyen's ROCE

In my book, this business could be worthy of further research. There might be better investments than Adyen out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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

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.

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. Thank you for reading.