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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. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Liberty Global (NASDAQ:LBTY.A), the trends above didn't look too great.
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. The formula for this calculation on Liberty Global is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0016 = US$59m ÷ (US$42b - US$4.4b) (Based on the trailing twelve months to September 2024).
Therefore, Liberty Global has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 8.6%.
View our latest analysis for Liberty Global
Above you can see how the current ROCE for Liberty Global compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Liberty Global for free.
How Are Returns Trending?
In terms of Liberty Global's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 2.4% five years ago, but since then it has dropped noticeably. 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 Liberty Global to turn into a multi-bagger.
The Bottom Line On Liberty Global's ROCE
In summary, it's unfortunate that Liberty Global is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 23% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with Liberty Global (including 1 which is concerning) .