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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Klassik Radio (ETR:KA8), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Klassik Radio, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = €1.4m ÷ (€19m - €7.8m) (Based on the trailing twelve months to June 2024).
Therefore, Klassik Radio has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Media industry.
Check out our latest analysis for Klassik Radio
Historical performance is a great place to start when researching a stock so above you can see the gauge for Klassik Radio's ROCE against it's prior returns. If you'd like to look at how Klassik Radio has performed in the past in other metrics, you can view this free graph of Klassik Radio's past earnings, revenue and cash flow.
So How Is Klassik Radio's ROCE Trending?
There is reason to be cautious about Klassik Radio, given the returns are trending downwards. About five years ago, returns on capital were 21%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Klassik Radio becoming one if things continue as they have.
On a side note, Klassik Radio's current liabilities are still rather high at 41% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.