Yahoo Finance Saga Communications (NASDAQ:SGA) Will Be Hoping To Turn Its Returns On Capital Around
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Saga Communications (NASDAQ:SGA), so let's see why.
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. Analysts use this formula to calculate it for Saga Communications:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = US$17m ÷ (US$248m - US$16m) (Based on the trailing twelve months to June 2022).
Therefore, Saga Communications has an ROCE of 7.2%. Even though it's in line with the industry average of 7.4%, it's still a low return by itself.
See our latest analysis for Saga Communications
Historical performance is a great place to start when researching a stock so above you can see the gauge for Saga Communications' ROCE against it's prior returns. If you're interested in investigating Saga Communications' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Saga Communications' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Saga Communications becoming one if things continue as they have.
Our Take On Saga Communications' ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 34% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing Saga Communications we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
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