Shenandoah Telecommunications (NASDAQ:SHEN) Is Finding It Tricky To Allocate Its Capital
If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Shenandoah Telecommunications (NASDAQ:SHEN) we aren't filled with optimism, but let's investigate further.
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. The formula for this calculation on Shenandoah Telecommunications is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = US$11m ÷ (US$1.0b - US$82m) (Based on the trailing twelve months to June 2023).
Therefore, Shenandoah Telecommunications has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 13%.
View our latest analysis for Shenandoah Telecommunications
Above you can see how the current ROCE for Shenandoah Telecommunications 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 Shenandoah Telecommunications.
How Are Returns Trending?
We are a bit anxious about the trends of ROCE at Shenandoah Telecommunications. Unfortunately, returns have declined substantially over the last five years to the 1.1% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 28% 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. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Key Takeaway
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing, we've spotted 1 warning sign facing Shenandoah Telecommunications that you might find interesting.
While Shenandoah Telecommunications 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.
