Here's What's Concerning About AMC Networks' (NASDAQ:AMCX) Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, AMC Networks (NASDAQ:AMCX) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for AMC Networks, this is the formula:

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

0.13 = US$545m ÷ (US$5.4b - US$1.3b) (Based on the trailing twelve months to September 2023).

Thus, AMC Networks has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 8.3% it's much better.

View our latest analysis for AMC Networks

Above you can see how the current ROCE for AMC Networks 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 AMC Networks here for free.

The Trend Of ROCE

There is reason to be cautious about AMC Networks, given the returns are trending downwards. To be more specific, the ROCE was 19% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect AMC Networks to turn into a multi-bagger.

What We Can Learn From AMC Networks' ROCE

In summary, it's unfortunate that AMC Networks is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 73% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about AMC Networks, we've spotted 2 warning signs, and 1 of them can't be ignored.

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.