Today we are going to look at Axon Enterprise, Inc. (NASDAQ:AAXN) to see whether it might be an attractive investment prospect. 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.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
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 Axon Enterprise:
0.045 = US$25m ÷ (US$720m – US$166m) (Based on the trailing twelve months to December 2018.)
So, Axon Enterprise has an ROCE of 4.5%.
Is Axon Enterprise’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Axon Enterprise’s ROCE appears to be significantly below the 11% average in the Aerospace & Defense industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Axon Enterprise stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Axon Enterprise’s current ROCE of 4.5% is lower than its ROCE in the past, which was 18%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Axon Enterprise.
Do Axon Enterprise’s Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Axon Enterprise has total assets of US$720m and current liabilities of US$166m. Therefore its current liabilities are equivalent to approximately 23% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
Our Take On Axon Enterprise’s ROCE
That’s not a bad thing, however Axon Enterprise has a weak ROCE and may not be an attractive investment. Of course you might be able to find a better stock than Axon Enterprise. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org. 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.