Some Investors May Be Worried About Shenandoah Telecommunications' (NASDAQ:SHEN) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Shenandoah Telecommunications (NASDAQ:SHEN) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Shenandoah Telecommunications is:

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

0.0025 = US$2.1m ÷ (US$883m - US$57m) (Based on the trailing twelve months to March 2022).

Thus, Shenandoah Telecommunications has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 5.3%.

View 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.

What The Trend Of ROCE Can Tell Us

In terms of Shenandoah Telecommunications' historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 0.2% we see today. In addition to that, Shenandoah Telecommunications is now employing 38% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In summary, it's unfortunate that Shenandoah Telecommunications is shrinking its capital base and also generating lower returns. Investors must expect better things on the horizon though because the stock has risen 19% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing to note, we've identified 2 warning signs with Shenandoah Telecommunications and understanding these should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.