Stock Analysis

iHeartMedia's (NASDAQ:IHRT) Returns On Capital Tell Us There Is Reason To Feel Uneasy

  •  Updated
NasdaqGS:IHRT
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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. 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)?

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 iHeartMedia, this is the formula:

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

0.021 = US$165m ÷ (US$9.1b - US$1.0b) (Based on the trailing twelve months to June 2021).

Therefore, iHeartMedia has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Media industry average of 9.8%.

See our latest analysis for iHeartMedia

roce
NasdaqGS:IHRT Return on Capital Employed September 24th 2021

In the above chart we have measured iHeartMedia's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From iHeartMedia's ROCE Trend?

In terms of iHeartMedia's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 2.1% we see today. On top of that, the business is utilizing 29% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. 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 Bottom Line On iHeartMedia's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these poor fundamentals, the stock has gained a huge 227% over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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