Shenandoah Telecommunications' (NASDAQ:SHEN) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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. Having said that, after a brief look, Shenandoah Telecommunications (NASDAQ:SHEN) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shenandoah Telecommunications, this is the formula:

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

0.0081 = US$7.8m ÷ (US$2.1b - US$1.2b) (Based on the trailing twelve months to June 2021).

So, Shenandoah Telecommunications has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 2.6%.

See our latest analysis for Shenandoah Telecommunications

In the above chart we have measured Shenandoah Telecommunications' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shenandoah Telecommunications.

How Are Returns Trending?

The trend of ROCE at Shenandoah Telecommunications is showing some signs of weakness. To be more specific, today's ROCE was 6.0% five years ago but has since fallen to 0.8%. In addition to that, Shenandoah Telecommunications is now employing 27% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 55%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.8%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Shenandoah Telecommunications' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 102%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Shenandoah Telecommunications does have some risks though, and we've spotted 3 warning signs for Shenandoah Telecommunications that you might be interested in.

While Shenandoah Telecommunications 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.
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