Here's What's Concerning About MediaCo Holding's (NASDAQ:MDIA) Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at MediaCo Holding (NASDAQ:MDIA), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)
0.022 = US$3.0m ÷ (US$148m - US$13m) (Based on the trailing twelve months to June 2021).
Therefore, MediaCo Holding has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.8%.
Check out our latest analysis for MediaCo Holding
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how MediaCo Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is MediaCo Holding's ROCE Trending?
When we looked at the ROCE trend at MediaCo Holding, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 2.2% from 7.0% two years ago. However it looks like MediaCo Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On MediaCo Holding's ROCE
In summary, MediaCo Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 31% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to know some of the risks facing MediaCo Holding we've found 5 warning signs (1 is significant!) that you should be aware of before investing here.
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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
