If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Cumulus Media (NASDAQ:CMLS) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Cumulus Media:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = US$139m ÷ (US$1.8b - US$126m) (Based on the trailing twelve months to March 2020).
So, Cumulus Media has an ROCE of 8.3%. On its own, that's a low figure but it's around the 9.8% average generated by the Media industry.
In the above chart we have a measured Cumulus Media's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cumulus Media.
So How Is Cumulus Media's ROCE Trending?
We're pretty happy with how the ROCE has been trending at Cumulus Media. We found that the returns on capital employed over the last five years have risen by 67%. The company is now earning US$0.08 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 53% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Bottom Line On Cumulus Media's ROCE
In the end, Cumulus Media has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 69% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
Cumulus Media does come with some risks though, we found 6 warning signs in our investment analysis, and 1 of those is potentially serious...
While Cumulus Media may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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