Why We Like Akazoo S.A.’s (NASDAQ:SONG) 12% Return On Capital Employed

Today we’ll evaluate Akazoo S.A. (NASDAQ:SONG) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

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

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Akazoo:

0.12 = €6.0m ÷ (€73m – €24m) (Based on the trailing twelve months to June 2019.)

Therefore, Akazoo has an ROCE of 12%.

View our latest analysis for Akazoo

Is Akazoo’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Akazoo’s ROCE is meaningfully higher than the 8.4% average in the Entertainment 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. Separate from Akazoo’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Take a look at the image below to see how Akazoo’s past growth compares to the average in its industry.

NasdaqCM:SONG Past Revenue and Net Income, October 15th 2019
NasdaqCM:SONG Past Revenue and Net Income, October 15th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Akazoo.

What Are Current Liabilities, And How Do They Affect Akazoo’s ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.

Akazoo has total assets of €73m and current liabilities of €24m. Therefore its current liabilities are equivalent to approximately 33% of its total assets. Akazoo has a middling amount of current liabilities, increasing its ROCE somewhat.

Our Take On Akazoo’s ROCE

Akazoo’s ROCE does look good, but the level of current liabilities also contribute to that. Akazoo shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like Akazoo better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.