Capital Allocation Trends At Klassik Radio (ETR:KA8) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Klassik Radio (ETR:KA8), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Klassik Radio is:

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

0.024 = €297k ÷ (€18m - €5.8m) (Based on the trailing twelve months to June 2023).

Thus, Klassik Radio has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Media industry average of 8.7%.

See our latest analysis for Klassik Radio

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'd like to look at how Klassik Radio has performed in the past in other metrics, you can view this free graph of Klassik Radio's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Klassik Radio doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 2.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Klassik Radio's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Klassik Radio. However, despite the promising trends, the stock has fallen 41% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 6 warning signs for Klassik Radio (1 is a bit concerning) you should be aware of.

While Klassik Radio may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.