Here's What's Concerning About Mediaset España Comunicación's (BME:TL5) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Mediaset España Comunicación (BME:TL5) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Mediaset España Comunicación, this is the formula:

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

0.14 = €192m ÷ (€1.7b - €264m) (Based on the trailing twelve months to December 2022).

So, Mediaset España Comunicación has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the Media industry.

Check out our latest analysis for Mediaset España Comunicación

In the above chart we have measured Mediaset España 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 Mediaset España Comunicación here for free.

What Can We Tell From Mediaset España Comunicación's ROCE Trend?

When we looked at the ROCE trend at Mediaset España Comunicación, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 26% five years ago. 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.

The Bottom Line On Mediaset España Comunicación's ROCE

To conclude, we've found that Mediaset España Comunicación is reinvesting in the business, but returns have been falling. Since the stock has declined 62% 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.

One more thing, we've spotted 1 warning sign facing Mediaset España Comunicación that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.