Returns On Capital Signal Tricky Times Ahead For AMC Networks (NASDAQ:AMCX)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at AMC Networks (NASDAQ:AMCX) and its ROCE trend, we weren't exactly thrilled.
Understanding 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 AMC Networks, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$708m ÷ (US$5.2b - US$878m) (Based on the trailing twelve months to December 2020).
Thus, AMC Networks has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Media industry.
See our latest analysis for AMC Networks
Above you can see how the current ROCE for AMC Networks 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 AMC Networks.
What Does the ROCE Trend For AMC Networks Tell Us?
On the surface, the trend of ROCE at AMC Networks doesn't inspire confidence. Over the last five years, returns on capital have decreased to 16% from 22% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.
The Bottom Line
To conclude, we've found that AMC Networks is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 19% in the last five years. Therefore based on the analysis done in this article, we don't think AMC Networks has the makings of a multi-bagger.
One more thing, we've spotted 5 warning signs facing AMC Networks that you might find interesting.
While AMC Networks 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.
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. 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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