In This Article:
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at AMC Networks (NASDAQ:AMCX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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 AMC Networks, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$740m ÷ (US$5.5b - US$975m) (Based on the trailing twelve months to June 2021).
Thus, AMC Networks has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Media industry.
View our latest analysis for AMC Networks
Above you can see how the current ROCE for AMC Networks 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 AMC Networks here for free.
What Can We Tell From AMC Networks' ROCE Trend?
When we looked at the ROCE trend at AMC Networks, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 16%. However it looks like AMC Networks might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From AMC Networks' ROCE
To conclude, we've found that AMC Networks is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
AMC Networks does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...