When researching a stock for investment, what can tell us that the company is in decline? 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. On that note, looking into iHeartMedia (NASDAQ:IHRT), we weren't too upbeat about how things were going.
What is 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 iHeartMedia is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = US$239m ÷ (US$8.9b - US$849m) (Based on the trailing twelve months to December 2021).
Therefore, iHeartMedia has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Media industry average of 7.2%.
In the above chart we have measured iHeartMedia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering iHeartMedia here for free.
What Can We Tell From iHeartMedia's ROCE Trend?
The trend of returns that iHeartMedia is generating are raising some concerns. To be more specific, today's ROCE was 10% five years ago but has since fallen to 3.0%. In addition to that, iHeartMedia is now employing 28% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. However the stock has delivered a 8.5% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
iHeartMedia does have some risks though, and we've spotted 1 warning sign for iHeartMedia that you might be interested in.
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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Find out whether iHeartMedia is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.