Returns On Capital At Ascential (LON:ASCL) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Ascential (LON:ASCL), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Ascential:

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

0.051 = UK£54m ÷ (UK£1.5b - UK£443m) (Based on the trailing twelve months to June 2023).

Therefore, Ascential has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Media industry average of 11%.

See our latest analysis for Ascential

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

So How Is Ascential's ROCE Trending?

On the surface, the trend of ROCE at Ascential doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.1% from 8.0% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Ascential is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 45% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you're still interested in Ascential it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Ascential may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.