Returns On Capital Signal Difficult Times Ahead For iHeartMedia (NASDAQ:IHRT)

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, iHeartMedia (NASDAQ:IHRT) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on iHeartMedia is:

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

0.028 = US$173m ÷ (US$7.0b - US$848m) (Based on the trailing twelve months to December 2023).

Therefore, iHeartMedia has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Media industry average of 8.3%.

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 .

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at iHeartMedia. To be more specific, today's ROCE was 6.6% five years ago but has since fallen to 2.8%. In addition to that, iHeartMedia is now employing 45% 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.

The Bottom Line On iHeartMedia's ROCE

To see iHeartMedia 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 89% in the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing iHeartMedia we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.