Adyen (AMS:ADYEN) Is Investing Its Capital With Increasing Efficiency

By
Simply Wall St
Published
February 21, 2022
ENXTAM:ADYEN
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Adyen (AMS:ADYEN) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Adyen, this is the formula:

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

0.36 = €595m ÷ (€4.6b - €2.9b) (Based on the trailing twelve months to December 2021).

So, Adyen has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.

View our latest analysis for Adyen

roce
ENXTAM:ADYEN Return on Capital Employed February 21st 2022

Above you can see how the current ROCE for Adyen compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Adyen here for free.

What Can We Tell From Adyen's ROCE Trend?

The trends we've noticed at Adyen are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 36%. The amount of capital employed has increased too, by 485%. So we're very much inspired by what we're seeing at Adyen thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 64%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Adyen has. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Adyen 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.

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