Capital Allocation Trends At Corus Entertainment (TSE:CJR.B) Aren't Ideal

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Corus Entertainment (TSE:CJR.B), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Corus Entertainment is:

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

0.082 = CA$176m ÷ (CA$2.7b - CA$588m) (Based on the trailing twelve months to August 2023).

Thus, Corus Entertainment has an ROCE of 8.2%. On its own, that's a low figure but it's around the 8.9% average generated by the Media industry.

View our latest analysis for Corus Entertainment

Above you can see how the current ROCE for Corus Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Corus Entertainment here for free.

What The Trend Of ROCE Can Tell Us

In terms of Corus Entertainment's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 11% five years ago but has since fallen to 8.2%. On top of that, the business is utilizing 51% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 21%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. We expect this has contributed to the stock plummeting 83% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Corus Entertainment does have some risks though, and we've spotted 2 warning signs for Corus Entertainment that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.