Saga Communications (NASDAQ:SGA) Will Be Hoping To Turn Its Returns On Capital Around
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after briefly looking over the numbers, we don't think Saga Communications (NASDAQ:SGA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Saga Communications:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = US$2.5m ÷ (US$246m - US$14m) (Based on the trailing twelve months to December 2020).
So, Saga Communications has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.1%.
Check out our latest analysis for Saga Communications
Historical performance is a great place to start when researching a stock so above you can see the gauge for Saga Communications' ROCE against it's prior returns. If you'd like to look at how Saga Communications has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Saga Communications doesn't inspire confidence. Around five years ago the returns on capital were 9.5%, but since then they've fallen to 1.1%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
What We Can Learn From Saga Communications' ROCE
In summary, we're somewhat concerned by Saga Communications' diminishing returns on increasing amounts 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 about the risks facing Saga Communications, we've discovered 1 warning sign that 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.
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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