Be Wary Of Entertainment Network (India) (NSE:ENIL) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Entertainment Network (India) (NSE:ENIL), so let's see why.

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 Entertainment Network (India) is:

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

0.054 = ₹512m ÷ (₹13b - ₹3.2b) (Based on the trailing twelve months to June 2024).

Thus, Entertainment Network (India) has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.4%.

View our latest analysis for Entertainment Network (India)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Entertainment Network (India) has performed in the past in other metrics, you can view this free graph of Entertainment Network (India)'s past earnings, revenue and cash flow.

So How Is Entertainment Network (India)'s ROCE Trending?

In terms of Entertainment Network (India)'s historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.9%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Entertainment Network (India) to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 25%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Entertainment Network (India)'s ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 22% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you're still interested in Entertainment Network (India) it's worth checking out our FREE intrinsic value approximation for ENIL to see if it's trading at an attractive price in other respects.

While Entertainment Network (India) 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.