When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Cinemark Holdings (NYSE:CNK), so let's see why.
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. To calculate this metric for Cinemark Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = US$57m ÷ (US$5.0b - US$726m) (Based on the trailing twelve months to June 2022).
Therefore, Cinemark Holdings has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 5.3%.
Check out our latest analysis for Cinemark Holdings
NYSE:CNK Return on Capital Employed October 4th 2022In the above chart we have measured Cinemark Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
We are a bit worried about the trend of returns on capital at Cinemark Holdings. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Cinemark Holdings to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that Cinemark Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 63% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Cinemark Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
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.
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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.