Emerald Holding's (NYSE:EEX) Returns On Capital Not Reflecting Well On The Business

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing 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, Emerald Holding (NYSE:EEX) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Emerald Holding, this is the formula:

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

0.0071 = US$6.0m ÷ (US$1.1b - US$226m) (Based on the trailing twelve months to June 2023).

Therefore, Emerald Holding has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Media industry average of 8.1%.

See our latest analysis for Emerald Holding

In the above chart we have measured Emerald Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Emerald Holding's ROCE Trend?

In terms of Emerald Holding's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 0.7% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 41% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 71% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Emerald Holding does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...

While Emerald Holding 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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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.