Shareholders Should Look Hard At Mediaco Holding Inc.’s (NASDAQ:MDIA) 4.5%Return On Capital
Today we'll evaluate Mediaco Holding Inc. (NASDAQ:MDIA) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Mediaco Holding:
0.045 = US$6.6m ÷ (US$167m - US$21m) (Based on the trailing twelve months to December 2019.)
Therefore, Mediaco Holding has an ROCE of 4.5%.
See our latest analysis for Mediaco Holding
Does Mediaco Holding Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Mediaco Holding's ROCE appears meaningfully below the 8.4% average reported by the Media industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Mediaco Holding stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
You can click on the image below to see (in greater detail) how Mediaco Holding's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Mediaco Holding is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Mediaco Holding's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Mediaco Holding has total assets of US$167m and current liabilities of US$21m. As a result, its current liabilities are equal to approximately 12% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
The Bottom Line On Mediaco Holding's ROCE
While that is good to see, Mediaco Holding has a low ROCE and does not look attractive in this analysis. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Mediaco Holding better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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