Shenandoah Telecommunications (NASDAQ:SHEN) Will Be Looking To Turn Around Its Returns

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 we looked into Shenandoah Telecommunications (NASDAQ:SHEN), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Shenandoah Telecommunications:

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

0.0099 = US$9.0m ÷ (US$1.0b - US$92m) (Based on the trailing twelve months to March 2023).

Therefore, Shenandoah Telecommunications has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 8.8%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Shenandoah Telecommunications' ROCE Trending?

The trend of returns that Shenandoah Telecommunications is generating are raising some concerns. To be more specific, today's ROCE was 5.0% five years ago but has since fallen to 1.0%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 31% 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 Key Takeaway

In summary, it's unfortunate that Shenandoah Telecommunications is shrinking its capital base and also generating lower returns. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Shenandoah Telecommunications, we've discovered 1 warning sign that you should be aware of.

While Shenandoah Telecommunications 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.