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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into iHeartMedia (NASDAQ:IHRT), the trends above didn't look too great.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for iHeartMedia, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0057 = US$48m ÷ (US$9.1b - US$660m) (Based on the trailing twelve months to September 2020).
So, iHeartMedia has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Media industry average of 9.2%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For iHeartMedia Tell Us?
In terms of iHeartMedia's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 0.6% we see today. On top of that, the business is utilizing 31% 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.
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 17% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
iHeartMedia does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.
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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