The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Activision Blizzard Inc (NASDAQ:ATVI) stock.
Buying Activision Blizzard makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to ATVI’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Activision Blizzard’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
ROCE: Explanation and Calculation
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Activision Blizzard’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Activision Blizzard’s ROCE for you below:
ROCE Calculation for ATVI
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$1.4b ÷ (US$18.0b – US$2.1b) = 8.9%
The calculation above shows that ATVI’s earnings were 8.9% of capital employed. This shows Activision Blizzard provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if ATVI is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.
What is causing this?
The underperforming ROCE is not ideal for Activision Blizzard investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, ATVI’s ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that ATVI’s ROCE has deteriorated from 9.1%, indicating the company’s capital returns have declined. We can see that earnings have actually increased from US$1.1b to US$1.4b but capital employed has increased by a relatively larger volume in response to an increase in total assets , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.
ATVI’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. Activision Blizzard’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for ATVI’s future growth? Take a look at our free research report of analyst consensus for ATVI’s outlook.
- Valuation: What is ATVI worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether ATVI is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.