If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. In light of that, from a first glance at IMAX (NYSE:IMAX), we've spotted some signs that it could be struggling, so let's investigate.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for IMAX:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = US$57m ÷ (US$851m - US$145m) (Based on the trailing twelve months to September 2023).
So, IMAX has an ROCE of 8.1%. On its own, that's a low figure but it's around the 9.6% average generated by the Entertainment industry.
View our latest analysis for IMAX
Above you can see how the current ROCE for IMAX compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for IMAX.
What Can We Tell From IMAX's ROCE Trend?
We are a bit worried about the trend of returns on capital at IMAX. Unfortunately the returns on capital have diminished from the 10% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on IMAX becoming one if things continue as they have.
Our Take On IMAX's ROCE
In summary, it's unfortunate that IMAX is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you're still interested in IMAX it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.