Did you know there are some financial metrics that can provide clues of a potential 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. 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 Media 6 (EPA:EDI), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Media 6 is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0094 = €514k ÷ (€86m - €31m) (Based on the trailing twelve months to September 2020).
So, Media 6 has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.8%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Media 6's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Media 6, check out these free graphs here.
How Are Returns Trending?
When we looked at the ROCE trend at Media 6, we didn't gain much confidence. Around five years ago the returns on capital were 6.1%, but since then they've fallen to 0.9%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.
In summary, we're somewhat concerned by Media 6's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 45% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Media 6 does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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. 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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