Lions Gate Entertainment (NYSE:LGF.A) Will Be Hoping To Turn Its Returns On Capital Around
When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Lions Gate Entertainment (NYSE:LGF.A), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lions Gate Entertainment is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.006 = US$29m ÷ (US$7.4b - US$2.6b) (Based on the trailing twelve months to March 2023).
Thus, Lions Gate Entertainment has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 12%.
View our latest analysis for Lions Gate Entertainment
In the above chart we have measured Lions Gate Entertainment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lions Gate Entertainment here for free.
So How Is Lions Gate Entertainment's ROCE Trending?
The trend of returns that Lions Gate Entertainment is generating are raising some concerns. To be more specific, today's ROCE was 5.3% five years ago but has since fallen to 0.6%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 26% 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.
Our Take On Lions Gate Entertainment's ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 51% 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.
Like most companies, Lions Gate Entertainment does come with some risks, and we've found 1 warning sign that you should be aware of.
While Lions Gate Entertainment may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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