How Well Is Media Prima Berhad (KLSE:MEDIA) Allocating Its Capital?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Media Prima Berhad (KLSE:MEDIA), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Media Prima Berhad:

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

0.019 = RM16m ÷ (RM1.3b - RM496m) (Based on the trailing twelve months to December 2020).

Thus, Media Prima Berhad has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Media industry average of 8.1%.

See our latest analysis for Media Prima Berhad

Above you can see how the current ROCE for Media Prima Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of Media Prima Berhad's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 1.9% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 58% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Media Prima Berhad's current liabilities have increased over the last five years to 37% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Media Prima Berhad's ROCE

To see Media Prima Berhad reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 50% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 2 warning signs for Media Prima Berhad you'll probably want to know about.

While Media Prima Berhad 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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