Atresmedia Corporación de Medios de Comunicación (BME:A3M) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Atresmedia Corporación de Medios de Comunicación (BME:A3M) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Atresmedia Corporación de Medios de Comunicación:

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

0.066 = €54m ÷ (€1.3b - €425m) (Based on the trailing twelve months to March 2021).

Therefore, Atresmedia Corporación de Medios de Comunicación has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Media industry average of 10%.

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.

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. Around five years ago the returns on capital were 23%, but since then they've fallen to 6.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Atresmedia Corporación de Medios de Comunicación has done well to pay down its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Atresmedia Corporación de Medios de Comunicación have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 54% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Atresmedia Corporación de Medios de Comunicación does come with some risks, and we've found 3 warning signs that you should be aware of.

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. 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.
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