Atresmedia Corporación de Medios de Comunicación (BME:A3M) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Atresmedia Corporación de Medios de Comunicación (BME:A3M), it didn't seem to tick all of these boxes.

What Is 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. To calculate this metric for Atresmedia Corporación de Medios de Comunicación, this is the formula:

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

0.16 = €157m ÷ (€1.5b - €529m) (Based on the trailing twelve months to December 2022).

Thus, Atresmedia Corporación de Medios de Comunicación has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Media industry.

View our latest analysis for Atresmedia Corporación de Medios de Comunicación

In the above chart we have measured Atresmedia Corporación de Medios de Comunicación's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Atresmedia Corporación de Medios de Comunicación here for free.

SWOT Analysis for Atresmedia Corporación de Medios de Comunicación

So How Is Atresmedia Corporación de Medios de Comunicación's ROCE Trending?

When we looked at the ROCE trend at Atresmedia Corporación de Medios de Comunicación, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Atresmedia Corporación de Medios de Comunicación has decreased its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Atresmedia Corporación de Medios de Comunicación's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Atresmedia Corporación de Medios de Comunicación does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

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.