Shenandoah Telecommunications (NASDAQ:SHEN) Could Be At Risk Of Shrinking As A Company

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. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Shenandoah Telecommunications (NASDAQ:SHEN), so let's see why.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Shenandoah Telecommunications is:

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

0.012 = US$9.7m ÷ (US$1.3b - US$485m) (Based on the trailing twelve months to September 2021).

Therefore, Shenandoah Telecommunications has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 3.6%.

Check out our latest analysis for Shenandoah Telecommunications

Above you can see how the current ROCE for Shenandoah Telecommunications compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenandoah Telecommunications here for free.

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at Shenandoah Telecommunications. The company used to generate 6.0% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 38% 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.2%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

To see Shenandoah Telecommunications reducing the capital employed in the business in tandem with diminishing returns, is concerning. However the stock has delivered a 52% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Shenandoah Telecommunications (including 1 which is concerning) .

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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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.