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Are Gray Television, Inc.’s (NYSE:GTN) Returns Worth Your While?

Simply Wall St

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Today we are going to look at Gray Television, Inc. (NYSE:GTN) to see whether it might be an attractive investment prospect. 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.

Firstly, we'll go over how we 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.

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

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

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 Gray Television:

0.092 = US$372m ÷ (US$4.2b - US$150m) (Based on the trailing twelve months to December 2018.)

Therefore, Gray Television has an ROCE of 9.2%.

Check out our latest analysis for Gray Television

Is Gray Television's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Gray Television's ROCE is around the 9.1% average reported by the Media industry. Aside from the industry comparison, Gray Television's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Our data shows that Gray Television currently has an ROCE of 9.2%, compared to its ROCE of 7.2% 3 years ago. This makes us think the business might be improving.

NYSE:GTN Past Revenue and Net Income, April 8th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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.

Gray Television's Current Liabilities And Their Impact On 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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Gray Television has total assets of US$4.2b and current liabilities of US$150m. Therefore its current liabilities are equivalent to approximately 3.6% of its total assets. With low levels of current liabilities, at least Gray Television's mediocre ROCE is not unduly boosted.

What We Can Learn From Gray Television's ROCE

Based on this information, Gray Television appears to be a mediocre business. You might be able to find a better buy than Gray Television. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.