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What Can We Make Of AMC Networks Inc.’s (NASDAQ:AMCX) High Return On Capital?

Simply Wall St

Today we'll evaluate AMC Networks Inc. (NASDAQ:AMCX) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for AMC Networks:

0.18 = US$849m ÷ (US$5.6b - US$809m) (Based on the trailing twelve months to June 2019.)

Therefore, AMC Networks has an ROCE of 18%.

View our latest analysis for AMC Networks

Does AMC Networks Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, AMC Networks's ROCE is meaningfully higher than the 9.0% average in the Media industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where AMC Networks sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can click on the image below to see (in greater detail) how AMC Networks's past growth compares to other companies.

NasdaqGS:AMCX Past Revenue and Net Income, October 15th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do AMC Networks's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

AMC Networks has total assets of US$5.6b and current liabilities of US$809m. Therefore its current liabilities are equivalent to approximately 15% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On AMC Networks's ROCE

Overall, AMC Networks has a decent ROCE and could be worthy of further research. There might be better investments than AMC Networks out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like AMC Networks better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.