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Return Trends At Splendid Medien (ETR:SPM) Aren't Appealing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Splendid Medien (ETR:SPM) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Splendid Medien, this is the formula:

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

0.18 = €2.1m ÷ (€33m - €22m) (Based on the trailing twelve months to June 2023).

So, Splendid Medien has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 11% it's much better.

Check out our latest analysis for Splendid Medien

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roce

Above you can see how the current ROCE for Splendid Medien compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Splendid Medien.

What The Trend Of ROCE Can Tell Us

Over the past five years, Splendid Medien's ROCE has remained relatively flat while the business is using 42% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. You could assume that if this continues, the business will be smaller in a few year time, so probably not a multi-bagger.

On a side note, Splendid Medien's current liabilities are still rather high at 65% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Splendid Medien's ROCE

It's a shame to see that Splendid Medien is effectively shrinking in terms of its capital base. And with the stock having returned a mere 4.4% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Splendid Medien, we've spotted 3 warning signs, and 2 of them are significant.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.