Liberty Global's (NASDAQ:LBTY.A) Returns On Capital Not Reflecting Well On The Business
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Liberty Global (NASDAQ:LBTY.A), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Liberty Global is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0051 = US$200m ÷ (US$43b - US$3.9b) (Based on the trailing twelve months to December 2022).
Thus, Liberty Global has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 7.0%.
View our latest analysis for Liberty Global
Above you can see how the current ROCE for Liberty Global compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Liberty Global.
What Does the ROCE Trend For Liberty Global Tell Us?
We are a bit worried about the trend of returns on capital at Liberty Global. Unfortunately the returns on capital have diminished from the 1.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Liberty Global becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that Liberty Global is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 33% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you'd like to know more about Liberty Global, we've spotted 4 warning signs, and 2 of them can'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.
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