Capital Allocation Trends At MediaCo Holding (NASDAQ:MDIA) Aren't Ideal

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into MediaCo Holding (NASDAQ:MDIA), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for MediaCo Holding:

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

0.039 = US$5.3m ÷ (US$152m - US$18m) (Based on the trailing twelve months to September 2021).

Thus, MediaCo Holding has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Media industry average of 8.8%.

View our latest analysis for MediaCo Holding

roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for MediaCo Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MediaCo Holding, check out these free graphs here.

What Can We Tell From MediaCo Holding's ROCE Trend?

We are a bit worried about the trend of returns on capital at MediaCo Holding. About two years ago, returns on capital were 5.5%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 two years. If these trends continue, we wouldn't expect MediaCo Holding to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 61% return over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching MediaCo Holding, you might be interested to know about the 4 warning signs that our analysis has discovered.

While MediaCo Holding 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.