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Why We’re Not Keen On Nexstar Media Group, Inc.’s (NASDAQ:NXST) 5.4% Return On Capital

Simply Wall St

Today we are going to look at Nexstar Media Group, Inc. (NASDAQ:NXST) 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Nexstar Media Group:

0.054 = US$704m ÷ (US$14b - US$1.1b) (Based on the trailing twelve months to September 2019.)

Therefore, Nexstar Media Group has an ROCE of 5.4%.

View our latest analysis for Nexstar Media Group

Is Nexstar Media Group's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Nexstar Media Group's ROCE is meaningfully below the Media industry average of 9.0%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, Nexstar Media Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Nexstar Media Group's current ROCE of 5.4% is lower than 3 years ago, when the company reported a 9.8% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Nexstar Media Group's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:NXST Past Revenue and Net Income, December 11th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Nexstar Media Group.

Nexstar Media Group's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Nexstar Media Group has total liabilities of US$1.1b and total assets of US$14b. As a result, its current liabilities are equal to approximately 7.8% of its total assets. Nexstar Media Group reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

The Bottom Line On Nexstar Media Group's ROCE

If performance improves, then Nexstar Media Group may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than Nexstar Media Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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. Thank you for reading.