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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. 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.
Understanding Return On Capital Employed (ROCE)
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. 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).
Thus, Klassik Radio has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Media industry.
See 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.
How Are Returns Trending?
In terms of Klassik Radio's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 21%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Klassik Radio to turn into a multi-bagger.
On a separate but related note, it's important to know that Klassik Radio has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. 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.