There Are Reasons To Feel Uneasy About Perion Network's (NASDAQ:PERI) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Perion Network (NASDAQ:PERI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

We've discovered 3 warning signs about Perion Network. View them for free.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Perion Network is:

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

0.0072 = US$5.4m ÷ (US$916m - US$162m) (Based on the trailing twelve months to December 2024).

So, Perion Network has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Media industry average of 8.7%.

Check out our latest analysis for Perion Network

In the above chart we have measured Perion Network'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 Perion Network for free.

So How Is Perion Network's ROCE Trending?

When we looked at the ROCE trend at Perion Network, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.0% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Perion Network has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

We're a bit apprehensive about Perion Network because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 105% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Perion Network does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Perion Network 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.

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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.