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iHeartMedia (NASDAQ:IHRT) Will Be Hoping To Turn Its Returns On Capital Around
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. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at iHeartMedia (NASDAQ:IHRT), we've spotted some signs that it could be struggling, so let's investigate.
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. Analysts use this formula to calculate it for iHeartMedia:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = US$132m ÷ (US$5.8b - US$739m) (Based on the trailing twelve months to June 2024).
Therefore, iHeartMedia has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Media industry average of 10%.
Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for iHeartMedia .
What The Trend Of ROCE Can Tell Us
The trend of ROCE at iHeartMedia is showing some signs of weakness. To be more specific, today's ROCE was 7.5% five years ago but has since fallen to 2.6%. On top of that, the business is utilizing 51% 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.
The Key Takeaway
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Unsurprisingly then, the stock has dived 87% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
On a final note, we found 3 warning signs for iHeartMedia (2 shouldn't be ignored) you should be aware of.
While iHeartMedia 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.
Valuation is complex, but we're here to simplify it.
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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.
About NasdaqGS:IHRT
iHeartMedia
Operates as an audio media company in the United States and internationally.
Undervalued low.