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Are Investors Concerned With What's Going On At iHeartMedia (NASDAQ:IHRT)?

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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 glancing at the trends within iHeartMedia (NASDAQ:IHRT), we weren't too hopeful.

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 iHeartMedia is:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.019 = US$158m ÷ (US$8.9b - US$593m) (Based on the trailing twelve months to June 2020).

Thus, iHeartMedia has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Media industry average of 9.6%.

See our latest analysis for iHeartMedia

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Above you can see how the current ROCE for iHeartMedia compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for iHeartMedia.

What Can We Tell From iHeartMedia's ROCE Trend?

In terms of iHeartMedia's historical ROCE trend, it isn't fantastic. The company used to generate 9.1% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 32% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On iHeartMedia's ROCE

In summary, it's unfortunate that iHeartMedia is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 26% from where it was year ago. Unless these trends revert to a more positive trajectory, we would look elsewhere.

If you'd like to know more about iHeartMedia, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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