Eutelsat Communications (EPA:ETL) Will Be Looking To Turn Around Its Returns

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Eutelsat Communications (EPA:ETL), we weren't too hopeful.

What is 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. The formula for this calculation on Eutelsat Communications is:

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

0.064 = €433m ÷ (€7.7b - €897m) (Based on the trailing twelve months to December 2020).

So, Eutelsat Communications has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Media industry average of 11%.

See our latest analysis for Eutelsat Communications

Above you can see how the current ROCE for Eutelsat Communications 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 Eutelsat Communications here for free.

What Can We Tell From Eutelsat Communications' ROCE Trend?

In terms of Eutelsat Communications' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.5% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Eutelsat Communications to turn into a multi-bagger.

The Bottom Line On Eutelsat Communications' ROCE

In summary, it's unfortunate that Eutelsat Communications is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 19% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Eutelsat Communications, we've discovered 2 warning signs that you should be aware of.

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