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How Do The E.W. Scripps Company’s (NASDAQ:SSP) Returns Compare To Its Industry?

Simply Wall St

Today we'll look at The E.W. Scripps Company (NASDAQ:SSP) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 E.W. Scripps:

0.052 = US$147m ÷ (US$3.0b - US$219m) (Based on the trailing twelve months to June 2019.)

So, E.W. Scripps has an ROCE of 5.2%.

Check out our latest analysis for E.W. Scripps

Does E.W. Scripps Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see E.W. Scripps's ROCE is meaningfully below the Media industry average of 8.9%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how E.W. Scripps stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

Our data shows that E.W. Scripps currently has an ROCE of 5.2%, compared to its ROCE of 0.4% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how E.W. Scripps's past growth compares to other companies.

NasdaqGS:SSP Past Revenue and Net Income, August 30th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do E.W. Scripps's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

E.W. Scripps has total assets of US$3.0b and current liabilities of US$219m. Therefore its current liabilities are equivalent to approximately 7.2% of its total assets. E.W. Scripps has very few current liabilities, which have a minimal effect on its already low ROCE.

Our Take On E.W. Scripps's ROCE

Nevertheless, there are potentially more attractive companies to invest in. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like E.W. Scripps 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.