There Are Reasons To Feel Uneasy About Atresmedia Corporación de Medios de Comunicación's (BME:A3M) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Atresmedia Corporación de Medios de Comunicación (BME:A3M), we don't think it's current trends fit the mold of a multi-bagger.

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

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. 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)

0.14 = €150m ÷ (€1.5b - €421m) (Based on the trailing twelve months to June 2022).

Thus, Atresmedia Corporación de Medios de Comunicación has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Media industry.

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 to see what analysts are forecasting going forward, you should check out our free report for Atresmedia Corporación de Medios de Comunicación.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Atresmedia Corporación de Medios de Comunicación doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 14%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Atresmedia Corporación de Medios de Comunicación has decreased its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. 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. 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. And in the last five years, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

On a final note, we found 2 warning signs for Atresmedia Corporación de Medios de Comunicación (1 makes us a bit uncomfortable) you should be aware of.

While Atresmedia Corporación de Medios de Comunicación 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.