Returns On Capital Signal Difficult Times Ahead For Cumulus Media (NASDAQ:CMLS)

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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. In light of that, from a first glance at Cumulus Media (NASDAQ:CMLS), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. The formula for this calculation on Cumulus Media is:

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

0.056 = US$80m ÷ (US$1.6b - US$138m) (Based on the trailing twelve months to March 2023).

Therefore, Cumulus Media has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.5%.

See our latest analysis for Cumulus Media

Above you can see how the current ROCE for Cumulus Media 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 Cumulus Media here for free.

What The Trend Of ROCE Can Tell Us

In terms of Cumulus Media's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 8.2% five years ago but has since fallen to 5.6%. On top of that, the business is utilizing 22% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

In Conclusion...

To see Cumulus Media reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 75% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 1 warning sign facing Cumulus Media that you might find interesting.

While Cumulus Media 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.