Returns On Capital At IMAX (NYSE:IMAX) Paint A Concerning Picture

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at IMAX (NYSE:IMAX), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for IMAX, this is the formula:

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

0.061 = US$43m ÷ (US$827m - US$112m) (Based on the trailing twelve months to June 2024).

Therefore, IMAX has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 10%.

View our latest analysis for IMAX

In the above chart we have measured IMAX'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 IMAX for free.

How Are Returns Trending?

There is reason to be cautious about IMAX, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.9% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect IMAX to turn into a multi-bagger.

Our Take On IMAX's ROCE

In summary, it's unfortunate that IMAX is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 0.5% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing to note, we've identified 1 warning sign with IMAX and understanding this should be part of your investment process.

While IMAX 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.