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Why Sinclair Broadcast Group, Inc.’s (NASDAQ:SBGI) Use Of Investor Capital Doesn’t Look Great

Simply Wall St

Today we'll evaluate Sinclair Broadcast Group, Inc. (NASDAQ:SBGI) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is 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.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Sinclair Broadcast Group:

0.024 = US$396m ÷ (US$18b - US$1.1b) (Based on the trailing twelve months to September 2019.)

Therefore, Sinclair Broadcast Group has an ROCE of 2.4%.

View our latest analysis for Sinclair Broadcast Group

Does Sinclair Broadcast Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Sinclair Broadcast Group's ROCE appears to be significantly below the 9.0% average in the Media industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Sinclair Broadcast Group's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

Sinclair Broadcast Group's current ROCE of 2.4% is lower than 3 years ago, when the company reported a 9.3% ROCE. So investors might consider if it has had issues recently. The image below shows how Sinclair Broadcast Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:SBGI Past Revenue and Net Income, December 12th 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Sinclair Broadcast Group.

What Are Current Liabilities, And How Do They Affect Sinclair Broadcast Group's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Sinclair Broadcast Group has total assets of US$18b and current liabilities of US$1.1b. As a result, its current liabilities are equal to approximately 6.1% of its total assets. Sinclair Broadcast Group has very few current liabilities, which have a minimal effect on its already low ROCE.

What We Can Learn From Sinclair Broadcast Group's ROCE

Nonetheless, there may be better places to invest your capital. You might be able to find a better investment than Sinclair Broadcast Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.