How Well Is Lucisano Media Group (BIT:LMG) Allocating Its Capital?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 Lucisano Media Group (BIT:LMG), so let's see why.

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. To calculate this metric for Lucisano Media Group, this is the formula:

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

0.0044 = €307k ÷ (€92m - €22m) (Based on the trailing twelve months to June 2020).

So, Lucisano Media Group has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 11%.

See our latest analysis for Lucisano Media Group

Above you can see how the current ROCE for Lucisano Media Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Lucisano Media Group.

What The Trend Of ROCE Can Tell Us

In terms of Lucisano Media Group's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 4.2% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Lucisano Media Group becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Lucisano Media Group is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 5 warning signs with Lucisano Media Group (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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