Capital Allocation Trends At Atresmedia Corporación de Medios de Comunicación (BME:A3M) Aren't Ideal

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Atresmedia Corporación de Medios de Comunicación (BME:A3M), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Atresmedia Corporación de Medios de Comunicación is:

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

0.067 = €55m ÷ (€1.3b - €495m) (Based on the trailing twelve months to December 2020).

Thus, Atresmedia Corporación de Medios de Comunicación has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Media industry average of 8.6%.

Check out our latest analysis for Atresmedia Corporación de Medios de Comunicación

Above you can see how the current ROCE for Atresmedia Corporación de Medios de Comunicación 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 Atresmedia Corporación de Medios de Comunicación here for free.

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

We are a bit worried about the trend of returns on capital at Atresmedia Corporación de Medios de Comunicación. To be more specific, the ROCE was 22% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Atresmedia Corporación de Medios de Comunicación to turn into a multi-bagger.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was five years ago. 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 3 warning signs for Atresmedia Corporación de Medios de Comunicación you'll probably want to know about.

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