Investors have encountered slowing capital returns at SKY Network Television (NZSE: SKT)
If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. However, after investigating SKY Network Television (NZSE:SKT), we don’t think current trends fit the mold of a multi-bagger.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. To calculate this metric for SKY Network Television, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = NZ$59 million ÷ (NZ$693 million – NZ$207 million) (Based on the last twelve months to December 2021).
Therefore, SKY Network Television has a ROCE of 12%. This is a fairly standard return and is in line with the industry average of 12%.
Check out our latest analysis for SKY Network Television
In the chart above, we measured SKY Network Television’s past ROCE against its past performance, but the future is arguably more important. If you want, you can check out forecasts from analysts covering SKY Network Television here for free.
What does the ROCE trend tell us for SKY Network Television?
We have noticed that although returns to capital have been stable over the past five years, the amount of capital used in the business has fallen by 72% over the same period. When a company does reduce its asset base, it’s usually not a sign of bullishness for that company. So if this trend continues, don’t be surprised if the company is smaller in a few years.
Another point of note, we noticed that the company has increased its current liabilities over the past five years. This is intriguing because if current liabilities had not increased to 30% of total assets, this reported ROCE would likely be less than 12%, as total capital employed would be higher. The ROCE of 12% could be even lower if current liabilities were not 30%. % of total assets, as the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, it introduces new elements of risk.
The Key Takeaway
Overall, we’re not thrilled to see SKY Network Television reducing the amount of capital it employs in the business. Investors seem to have little hope for these trends to improve, and that may have contributed in part to the stock’s 71% crash over the past five years. Therefore, based on the analysis performed in this article, we do not believe that SKY Network Television has the makings of a multi-bagger.
If you’re still interested in SKY Network Television, it’s worth checking out our FREE Intrinsic Value Estimate to see if it is trading at an attractive price in other respects.
Although SKY Network Television does not generate the highest return, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.