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What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Saga Communications (NASDAQ:SGA) we aren't filled with optimism, but let's investigate further.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Saga Communications:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$9.2m ÷ (US$218m - US$20m) (Based on the trailing twelve months to March 2024).
Therefore, Saga Communications has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Media industry average of 11%.
Check out our latest analysis for Saga Communications
In the above chart we have measured Saga Communications' 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 analyst report for Saga Communications .
What The Trend Of ROCE Can Tell Us
In terms of Saga Communications' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 8.5% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Saga Communications becoming one if things continue as they have.
What We Can Learn From Saga Communications' ROCE
In summary, it's unfortunate that Saga Communications is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 24% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.