AdTheorent Holding Company's (NASDAQ:ADTH) Returns On Capital Not Reflecting Well On The Business

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating AdTheorent Holding Company (NASDAQ:ADTH), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for AdTheorent Holding Company:

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

0.011 = US$1.8m ÷ (US$179m - US$18m) (Based on the trailing twelve months to March 2023).

So, AdTheorent Holding Company has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Media industry average of 9.4%.

Check out our latest analysis for AdTheorent Holding Company

Above you can see how the current ROCE for AdTheorent Holding Company 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 AdTheorent Holding Company.

SWOT Analysis for AdTheorent Holding Company

So How Is AdTheorent Holding Company's ROCE Trending?

In terms of AdTheorent Holding Company's historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 15%, but since then they've fallen to 1.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, AdTheorent Holding Company has decreased its current liabilities to 10% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From AdTheorent Holding Company's ROCE

Bringing it all together, while we're somewhat encouraged by AdTheorent Holding Company's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 58% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 3 warning signs with AdTheorent Holding Company (at least 2 which don't sit too well with us) , 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.