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Examining Entercom Communications Corp.’s (NYSE:ETM) Weak Return On Capital Employed

Brandie Wetzel

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Today we’ll evaluate Entercom Communications Corp. (NYSE:ETM) to determine whether it could have potential as an investment idea. 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 of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

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 Entercom Communications:

0.044 = US$86m ÷ (US$4.5b – US$228m) (Based on the trailing twelve months to September 2018.)

So, Entercom Communications has an ROCE of 4.4%.

Check out our latest analysis for Entercom Communications

Is Entercom Communications’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Entercom Communications’s ROCE appears to be significantly below the 8.4% average in the Media industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Entercom Communications’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

As we can see, Entercom Communications currently has an ROCE of 4.4%, less than the 9.2% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

NYSE:ETM Past Revenue and Net Income, February 20th 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Entercom Communications’s Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Entercom Communications has total liabilities of US$228m and total assets of US$4.5b. As a result, its current liabilities are equal to approximately 5.0% of its total assets. Entercom Communications has very few current liabilities, which have a minimal effect on its already low ROCE.

The Bottom Line On Entercom Communications’s ROCE

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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.