Shenandoah Telecommunications (NASDAQ:SHEN) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Shenandoah Telecommunications (NASDAQ:SHEN), we weren't too hopeful.

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. The formula for this calculation on Shenandoah Telecommunications is:

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

0.0067 = US$5.9m ÷ (US$978m - US$96m) (Based on the trailing twelve months to December 2022).

So, Shenandoah Telecommunications has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 7.2%.

See 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?

In terms of Shenandoah Telecommunications' 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 31% over that same period. 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. 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.

In Conclusion...

In summary, it's unfortunate that Shenandoah Telecommunications is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Shenandoah Telecommunications does come with some risks, and we've found 1 warning sign that you should be aware of.

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.