Here's What's Concerning About iHeartMedia's (NASDAQ:IHRT) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at iHeartMedia (NASDAQ:IHRT), so let's see why.

What Is 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. To calculate this metric for iHeartMedia, this is the formula:

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

0.034 = US$160m ÷ (US$5.6b - US$870m) (Based on the trailing twelve months to December 2024).

Therefore, iHeartMedia has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Media industry average of 10.0%.

See our latest analysis for iHeartMedia

Above you can see how the current ROCE for iHeartMedia 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 iHeartMedia for free.

The Trend Of ROCE

The trend of returns that iHeartMedia is generating are raising some concerns. The company used to generate 5.8% on its capital five years ago but it has since fallen noticeably. In addition to that, iHeartMedia is now employing 55% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

In Conclusion...

In summary, it's unfortunate that iHeartMedia is shrinking its capital base and also generating lower returns. Unsurprisingly then, the stock has dived 86% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with iHeartMedia and understanding them should be part of your investment process.

While iHeartMedia 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.