What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Sirius XM Holdings (NASDAQ:SIRI) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sirius XM Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$2.0b ÷ (US$27b - US$3.1b) (Based on the trailing twelve months to September 2024).
Thus, Sirius XM Holdings has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Media industry average of 9.6%.
In the above chart we have measured Sirius XM Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sirius XM Holdings for free.
What Can We Tell From Sirius XM Holdings' ROCE Trend?
In terms of Sirius XM Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 23% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Sirius XM Holdings has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Sirius XM Holdings' ROCE
Bringing it all together, while we're somewhat encouraged by Sirius XM Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 63% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Sirius XM Holdings has the makings of a multi-bagger.
One more thing: We've identified 2 warning signs with Sirius XM Holdings (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.
While Sirius XM Holdings 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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
