Returns On Capital At AMC Networks (NASDAQ:AMCX) Paint A Concerning Picture

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. And from a first read, things don't look too good at AMC Networks (NASDAQ:AMCX), so let's see why.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.14 = US$565m ÷ (US$5.5b - US$1.4b) (Based on the trailing twelve months to June 2023).

So, AMC Networks has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Media industry.

See our latest analysis for AMC Networks

In the above chart we have measured AMC Networks' 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 AMC Networks here for free.

How Are Returns Trending?

In terms of AMC Networks' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 19% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on AMC Networks becoming one if things continue as they have.

On a side note, AMC Networks' current liabilities have increased over the last five years to 25% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 14%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

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 81% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, AMC Networks does come with some risks, and we've found 1 warning sign that you should be aware of.

While AMC Networks 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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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.