If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Southern Cross Media Group (ASX:SXL), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Southern Cross Media Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = AU$25m ÷ (AU$1.3b - AU$78m) (Based on the trailing twelve months to December 2021).
Therefore, Southern Cross Media Group has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Media industry average of 9.3%.
In the above chart we have measured Southern Cross Media Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Southern Cross Media Group.
What Can We Tell From Southern Cross Media Group's ROCE Trend?
There is reason to be cautious about Southern Cross Media Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.0% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Southern Cross Media Group to turn into a multi-bagger.
The Bottom Line
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. We expect this has contributed to the stock plummeting 76% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a separate note, we've found 2 warning signs for Southern Cross Media Group you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.