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If you’re looking for a mature business that’s beyond the expansion phase, what are some of the underlying trends that are emerging?A potentially declining business shows two trends: a declining return on contracted capital (ROCE) and a declining contracted capital base. Ultimately, these trends mean that the company reduces its investments and also earns less on what it invests. That said, after a brief look at Corus Entertainment (TSE:CJR. B), we are not full of optimism, but let’s dig deeper.
Just to explain if you’re not sure, ROCE is a metric for assessing the source of pre-tax income (as a percentage) a company earns on the capital invested in its business. The formula for this calculation in Corus Entertainment is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0. 082 = C$176 million ÷ (C$2. 7 billion – C$588 million) (based on the last twelve months to August 2023).
As a result, Corus Entertainment recorded an ROCE of 8. 2%. While in line with the industry average of 8. 3%, this is still a low pullback on its own.
Check out our latest research for Corus Entertainment
Above, you can see how Corus Entertainment’s existing ROCE compares to its return on equity beyond, but there’s only so much it can say about the afterlife. If you are interested, you can check out the analyst forecasts in our loose analyst forecast report for the company.
As for Corus Entertainment’s old ROCE trend, it’s not fantastic. Unfortunately, yields have particularly declined over the past five years to the current 8. 2%. Equally concerning is that the amount of capital deployed in the company has decreased by 51% over the same period. The fact that either is down indicates that the company is going through a difficult time. Generally, companies with these characteristics are not the ones that tend to multiply in the long term, because statistically speaking they have already gone through the expansion phase of their life cycle.
In this sense, we observed that the ratio between existing liabilities and total assets increased to 21%, which had an effect on ROCE. Without this increase, the ROCE would most likely still be below 8. 2%. The ratio is not too high at the moment, it is worth paying attention to it, because if it becomes high, the company could face new threat elements.
In summary, it’s unfortunate that Corus Entertainment is shrinking its capital base and also generating lower returns. We expect this has contributed to the stock plummeting 84% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing to note: we’ve learned of a cautionary sign at Corus Entertainment and understand that it’s part of their investment process.
While Corus Entertainment 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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