Shenandoah Telecommunications (NASDAQ:SHEN) Could Be At Risk Of Shrinking As A Company

Simply Wall St ·  10/07/2023 22:09

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Shenandoah Telecommunications (NASDAQ:SHEN), so let's see why.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Shenandoah Telecommunications is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.011 = US$11m ÷ (US$1.0b - US$82m) (Based on the trailing twelve months to June 2023).

So, Shenandoah Telecommunications has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 14%.

See our latest analysis for Shenandoah Telecommunications

NasdaqGS:SHEN Return on Capital Employed October 7th 2023

Above you can see how the current ROCE for Shenandoah Telecommunications compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenandoah Telecommunications here for free.

How Are Returns Trending?

In terms of Shenandoah Telecommunications' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 5.8% five years ago but has since fallen to 1.1%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 28% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On Shenandoah Telecommunications' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Shenandoah Telecommunications does have some risks though, and we've spotted 1 warning sign for Shenandoah Telecommunications that you might be interested in.

While Shenandoah Telecommunications 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.

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