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Is New Media Investment Group Inc. (NYSE:NEWM) Investing Your Capital Efficiently?

Simply Wall St

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Today we are going to look at New Media Investment Group Inc. (NYSE:NEWM) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

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. Ultimately, it is a useful but imperfect metric. 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'.

How Do You Calculate Return On Capital Employed?

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 New Media Investment Group:

0.058 = US$74m ÷ (US$1.5b - US$260m) (Based on the trailing twelve months to March 2019.)

Therefore, New Media Investment Group has an ROCE of 5.8%.

View our latest analysis for New Media Investment Group

Does New Media Investment Group Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, New Media Investment Group's ROCE appears meaningfully below the 8.5% average reported by the Media industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how New Media Investment Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

You can see in the image below how New Media Investment Group's ROCE compares to its industry. Click to see more on past growth.

NYSE:NEWM Past Revenue and Net Income, July 19th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if New Media Investment Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How New Media Investment Group's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

New Media Investment Group has total assets of US$1.5b and current liabilities of US$260m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

The Bottom Line On New Media Investment Group's ROCE

If New Media Investment Group continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than New Media Investment Group. 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).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.