The Returns On Capital At AMC Networks (NASDAQ:AMCX) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at AMC Networks (NASDAQ:AMCX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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)

0.12 = US$578m ÷ (US$5.8b - US$1.1b) (Based on the trailing twelve months to June 2022).

Thus, AMC Networks has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 7.5% 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

When we looked at the ROCE trend at AMC Networks, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 12%. However it looks like AMC Networks might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On AMC Networks' ROCE

To conclude, we've found that AMC Networks is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 63% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a separate note, we've found 2 warning signs for AMC Networks you'll probably want to know about.

While AMC Networks may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.