Slowing Rates Of Return At 4fun Media (WSE:4FM) Leave Little Room For Excitement

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at 4fun Media (WSE:4FM) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on 4fun Media is:

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

0.095 = zł4.0m ÷ (zł58m - zł16m) (Based on the trailing twelve months to March 2021).

So, 4fun Media has an ROCE of 9.5%. Ultimately, that's a low return and it under-performs the Media industry average of 16%.

Check out our latest analysis for 4fun Media

Historical performance is a great place to start when researching a stock so above you can see the gauge for 4fun Media's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of 4fun Media, check out these free graphs here.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at 4fun Media. The company has consistently earned 9.5% for the last five years, and the capital employed within the business has risen 42% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

Long story short, while 4fun Media has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 4.6% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for 4fun Media (of which 2 can't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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