What These Trends Mean At Media Prima Berhad (KLSE:MEDIA)

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. 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.

Understanding 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 Media Prima Berhad is:

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

0.00025 = RM215k ÷ (RM1.4b - RM543m) (Based on the trailing twelve months to September 2020).

So, Media Prima Berhad has an ROCE of 0.03%. In absolute terms, that's a low return and it also under-performs the Media industry average of 7.6%.

Check out our latest analysis for Media Prima Berhad

In the above chart we have measured Media Prima Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Media Prima Berhad here for free.

What Does the ROCE Trend For Media Prima Berhad 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 0.03% we see today. On top of that, the business is utilizing 58% less capital within its operations. 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 39% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.03%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Media Prima Berhad's ROCE

To see Media Prima Berhad reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 84% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 3 warning signs with Media Prima Berhad and understanding them should be part of your investment process.

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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