Southern Cross Media Group (ASX:SXL) Will Be Looking To Turn Around Its Returns

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Southern Cross Media Group (ASX:SXL), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Southern Cross Media Group is:

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).

So, 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 8.0%.

See our latest analysis for Southern Cross Media Group

Above you can see how the current ROCE for Southern Cross Media Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Southern Cross Media Group.

So How Is Southern Cross Media Group's ROCE Trending?

We are a bit worried about the trend of returns on capital at Southern Cross Media Group. About five years ago, returns on capital were 9.0%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Southern Cross Media Group becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Southern Cross Media Group is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 81% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Southern Cross Media Group, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Southern Cross Media Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.