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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. And from a first read, things don't look too good at Marcus (NYSE:MCS), so let's see why.
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 Marcus, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = US$30m ÷ (US$1.1b - US$147m) (Based on the trailing twelve months to September 2023).
Therefore, Marcus has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 9.6%.
See our latest analysis for Marcus
In the above chart we have measured Marcus' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Marcus Tell Us?
There is reason to be cautious about Marcus, given the returns are trending downwards. About five years ago, returns on capital were 9.9%, 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. 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 Marcus becoming one if things continue as they have.
The Key Takeaway
In summary, it's unfortunate that Marcus is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 65% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to continue researching Marcus, you might be interested to know about the 2 warning signs that our analysis has discovered.