Live Nation Entertainment, Inc.’s (NYSE:LYV) Investment Returns Are Lagging Its Industry
Today we'll look at Live Nation Entertainment, Inc. (NYSE:LYV) and reflect on its potential as an investment. 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.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Live Nation Entertainment:
0.06 = US$361m ÷ (US$10.0b - US$4.0b) (Based on the trailing twelve months to September 2019.)
Therefore, Live Nation Entertainment has an ROCE of 6.0%.
Check out our latest analysis for Live Nation Entertainment
Is Live Nation Entertainment's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Live Nation Entertainment's ROCE appears to be significantly below the 9.1% average in the Entertainment industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Live Nation Entertainment's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Our data shows that Live Nation Entertainment currently has an ROCE of 6.0%, compared to its ROCE of 4.6% 3 years ago. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Live Nation Entertainment's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Live Nation Entertainment.
How Live Nation Entertainment's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Live Nation Entertainment has total assets of US$10.0b and current liabilities of US$4.0b. As a result, its current liabilities are equal to approximately 40% of its total assets. Live Nation Entertainment's middling level of current liabilities have the effect of boosting its ROCE a bit.
What We Can Learn From Live Nation Entertainment's ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. You might be able to find a better investment than Live Nation Entertainment. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
