ProSiebenSat.1 Media (ETR:PSM) Has Some Difficulty Using Its Capital Effectively

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. On that note, looking into ProSiebenSat.1 Media (ETR:PSM), we weren't too upbeat about how things were going.

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

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. To calculate this metric for ProSiebenSat.1 Media, this is the formula:

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 December 2022).

Therefore, ProSiebenSat.1 Media has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Media industry average of 12%.

See 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, you can check out the forecasts from the analysts covering ProSiebenSat.1 Media here for free.

SWOT Analysis for ProSiebenSat.1 Media

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at ProSiebenSat.1 Media. About five years ago, returns on capital were 18%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect ProSiebenSat.1 Media to turn into a multi-bagger.

What We Can Learn From ProSiebenSat.1 Media's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 66% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 4 warning signs for ProSiebenSat.1 Media you'll probably want to know about.

While ProSiebenSat.1 Media 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.