Yahoo Finance Returns On Capital Signal Tricky Times Ahead For CommScope Holding Company (NASDAQ:COMM)
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at CommScope Holding Company (NASDAQ:COMM) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on CommScope Holding Company is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = US$518m ÷ (US$9.4b - US$1.4b) (Based on the trailing twelve months to December 2023).
Therefore, CommScope Holding Company has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Communications industry average of 8.3%.
Check out our latest analysis for CommScope Holding Company
In the above chart we have measured CommScope Holding Company's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CommScope Holding Company for free.
How Are Returns Trending?
On the surface, the trend of ROCE at CommScope Holding Company doesn't inspire confidence. Around five years ago the returns on capital were 8.6%, but since then they've fallen to 6.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for CommScope Holding Company have fallen, meanwhile the business is employing more capital than it was five years ago. We expect this has contributed to the stock plummeting 95% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing: We've identified 3 warning signs with CommScope Holding Company (at least 1 which is potentially serious) , and understanding them would certainly be useful.
While CommScope Holding Company 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.
