We Like Adyen's (AMS:ADYEN) Returns And Here's How They're Trending

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Adyen (AMS:ADYEN) we really liked what we saw.

What is 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)

0.26 = €374m ÷ (€4.2b - €2.7b) (Based on the trailing twelve months to December 2020).

Therefore, Adyen has an ROCE of 26%. In absolute terms that's a great return and it's even better than the IT industry average of 13%.

View our latest analysis for Adyen

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Adyen's ROCE Trending?

We like the trends that we're seeing from Adyen. Over the last five years, returns on capital employed have risen substantially to 26%. The amount of capital employed has increased too, by 480%. So we're very much inspired by what we're seeing at Adyen thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Adyen has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Adyen's ROCE

To sum it up, Adyen has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. 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.

If you'd like to know about the risks facing Adyen, we've discovered 2 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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