ProSiebenSat.1 Media's (ETR:PSM) Returns On Capital Not Reflecting Well On The Business
If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at ProSiebenSat.1 Media (ETR:PSM), we've spotted some signs that it could be struggling, so let's investigate.
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. To calculate this metric for ProSiebenSat.1 Media, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = €331m ÷ (€6.2b - €1.4b) (Based on the trailing twelve months to September 2022).
Therefore, ProSiebenSat.1 Media has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Media industry average of 12%.
See our latest analysis for ProSiebenSat.1 Media
Above you can see how the current ROCE for ProSiebenSat.1 Media compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ProSiebenSat.1 Media here for free.
The Trend Of ROCE
In terms of ProSiebenSat.1 Media's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 18% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect ProSiebenSat.1 Media to turn into a multi-bagger.
Our Take On ProSiebenSat.1 Media's ROCE
In summary, it's unfortunate that ProSiebenSat.1 Media is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 58% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we've found 4 warning signs for ProSiebenSat.1 Media that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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