MediaCo Holding (NASDAQ: MDIA) returns on capital tell us there are reasons to be uncomfortable

When it comes to investing, there are some useful financial metrics that can alert us when a business is potentially in trouble. Declining businesses often have two underlying trends, on the one hand, a decline to return to on capital employed (ROCE) and a decrease based capital employed. Such trends ultimately mean that the company is reducing its investments and also earning less for what it has invested. In light of this, from a first glance at MediaCo Holding (NASDAQ: MDIA) we’ve spotted signs that it may be in trouble, so let’s investigate.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on MediaCo Holding is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.039 = US $ 5.3 million ÷ (US $ 152 million – US $ 18 million) (Based on the last twelve months up to September 2021).

So, MediaCo Holding has a ROCE of 3.9%. In absolute terms, this is a low return and it is also below the media industry average of 8.4%.

See our latest analysis for MediaCo Holding

NasdaqCM: MDIA Return on capital employed on January 9, 2022

Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to look at MediaCo Holding’s performance in the past in other metrics, you can check out this free graph of past income, income and cash flow.

What the ROCE trend can tell us

We are a little worried about the evolution of capital returns at MediaCo Holding. Unfortunately, returns on capital have fallen from the 5.5% they earned two years ago. In addition to this, it should be noted that the amount of capital employed within the company has remained relatively stable. As returns decline and the company has the same number of assets employed, this may suggest that it is a mature company that has not seen much growth in the past couple of years. So, because these trends are generally not conducive to building a multi-bagger, we won’t be holding our breath on MediaCo Holding in becoming one if things continue as they have.

What we can learn from MediaCo Holding’s ROCE

In summary, it is unfortunate that MediaCo Holding generates lower returns from the same amount of capital. Given that the stock has climbed 103% in the past year, it seems investors have high expectations for the stock. Either way, we don’t feel very comfortable with the fundamentals so we are avoiding this action for now.

On a separate note we have found 4 warning signs for MediaCo Holding you will probably want to know more.

While MediaCo Holding does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

Comments are closed.