Sirius XM Holdings (NASDAQ:SIRI) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Sirius XM Holdings (NASDAQ:SIRI) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Sirius XM Holdings:

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

0.082 = US$2.0b ÷ (US$27b - US$3.1b) (Based on the trailing twelve months to September 2024).

So, Sirius XM Holdings has an ROCE of 8.2%. On its own, that's a low figure but it's around the 9.7% average generated by the Media industry.

View our latest analysis for Sirius XM Holdings

In the above chart we have measured Sirius XM Holdings' 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 Sirius XM Holdings for free.

What Can We Tell From Sirius XM Holdings' ROCE Trend?

When we looked at the ROCE trend at Sirius XM Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.2% from 23% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Sirius XM Holdings has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Sirius XM Holdings' ROCE

In summary, Sirius XM Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 65% in the last five years. Therefore based on the analysis done in this article, we don't think Sirius XM Holdings has the makings of a multi-bagger.

Sirius XM Holdings does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Sirius XM Holdings 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.