Emerald Holding (NYSE:EEX) May Have Issues Allocating Its Capital
When researching a stock for investment, what can tell us that the company is in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Emerald Holding (NYSE:EEX), so let's see why.
Understanding 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. To calculate this metric for Emerald Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0081 = US$6.9m ÷ (US$1.1b - US$226m) (Based on the trailing twelve months to June 2023).
So, Emerald Holding has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Media industry average of 8.5%.
View our latest analysis for Emerald Holding
In the above chart we have measured Emerald Holding's 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
We are a bit anxious about the trends of ROCE at Emerald Holding. To be more specific, today's ROCE was 7.5% five years ago but has since fallen to 0.8%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 41% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
What We Can Learn From Emerald Holding's ROCE
In summary, it's unfortunate that Emerald Holding is shrinking its capital base and also generating lower returns. This could explain why the stock has sunk a total of 71% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with Emerald Holding (including 2 which shouldn't be ignored) .
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.
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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.
