Capital Allocation Trends At ProSiebenSat.1 Media (ETR:PSM) Aren't Ideal

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at ProSiebenSat.1 Media (ETR:PSM), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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 ProSiebenSat.1 Media is:

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

0.068 = €331m ÷ (€6.2b - €1.4b) (Based on the trailing twelve months to September 2022).

So, ProSiebenSat.1 Media has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Media industry average of 15%.

Check out our latest analysis for ProSiebenSat.1 Media

Above you can see how the current ROCE for ProSiebenSat.1 Media 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 ProSiebenSat.1 Media.

What Can We Tell From ProSiebenSat.1 Media's ROCE Trend?

There is reason to be cautious about ProSiebenSat.1 Media, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 18% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on ProSiebenSat.1 Media becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that ProSiebenSat.1 Media is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 59% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing ProSiebenSat.1 Media, we've discovered 4 warning signs 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.

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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.