Here’s What’s Happening With Returns At RCS MediaGroup (BIT:RCS)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at RCS MediaGroup (BIT:RCS) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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 RCS MediaGroup, this is the formula:

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

0.052 = €34m ÷ (€939m - €282m) (Based on the trailing twelve months to September 2020).

So, RCS MediaGroup has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Media industry average of 8.0%.

View our latest analysis for RCS MediaGroup

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

So How Is RCS MediaGroup's ROCE Trending?

RCS MediaGroup has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 253% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

One more thing to note, RCS MediaGroup has decreased current liabilities to 30% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

To bring it all together, RCS MediaGroup has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 34% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 3 warning signs with RCS MediaGroup and understanding these should be part of your investment process.

While RCS MediaGroup 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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