AMC Entertainment Holdings (NYSE:AMC) Could Be At Risk Of Shrinking As A Company
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. So after glancing at the trends within AMC Entertainment Holdings (NYSE:AMC), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for AMC Entertainment Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0045 = US$33m ÷ (US$9.0b - US$1.6b) (Based on the trailing twelve months to December 2023).
So, AMC Entertainment Holdings has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 8.4%.
Check out our latest analysis for AMC Entertainment Holdings
In the above chart we have measured AMC Entertainment Holdings' 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 analyst report for AMC Entertainment Holdings .
What Can We Tell From AMC Entertainment Holdings' ROCE Trend?
We are a bit worried about the trend of returns on capital at AMC Entertainment Holdings. To be more specific, the ROCE was 3.8% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on AMC Entertainment Holdings becoming one if things continue as they have.
The Key Takeaway
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. We expect this has contributed to the stock plummeting 94% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
AMC Entertainment Holdings does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.
While AMC Entertainment Holdings 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.
