Will the Promising Trends At Postmedia Network Canada (TSE:PNC.B) Continue?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Postmedia Network Canada (TSE:PNC.B) so let's look a bit deeper.

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 Postmedia Network Canada, this is the formula:

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

0.17 = CA$39m ÷ (CA$337m - CA$109m) (Based on the trailing twelve months to August 2020).

Thus, Postmedia Network Canada has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 10% it's much better.

Check out our latest analysis for Postmedia Network Canada

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Postmedia Network Canada, check out these free graphs here.

What Does the ROCE Trend For Postmedia Network Canada Tell Us?

We're pretty happy with how the ROCE has been trending at Postmedia Network Canada. We found that the returns on capital employed over the last five years have risen by 260%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Postmedia Network Canada appears to been achieving more with less, since the business is using 68% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 32% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

In a nutshell, we're pleased to see that Postmedia Network Canada has been able to generate higher returns from less capital. However the stock is down a substantial 96% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Like most companies, Postmedia Network Canada does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

If you decide to trade Postmedia Network Canada, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.