Investors Could Be Concerned With iHeartMedia's (NASDAQ:IHRT) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into iHeartMedia (NASDAQ:IHRT), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for iHeartMedia:

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

0.052 = US$392m ÷ (US$8.3b - US$832m) (Based on the trailing twelve months to December 2022).

Therefore, iHeartMedia has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.4%.

Check out our latest analysis for iHeartMedia

In the above chart we have measured iHeartMedia'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 iHeartMedia here for free.

What Does the ROCE Trend For iHeartMedia Tell Us?

The trend of ROCE at iHeartMedia is showing some signs of weakness. To be more specific, today's ROCE was 6.6% four years ago but has since fallen to 5.2%. On top of that, the business is utilizing 32% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On iHeartMedia's ROCE

To see iHeartMedia reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was three years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for iHeartMedia (1 is significant) you should be aware of.

While iHeartMedia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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