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Lions Gate Entertainment (NYSE: LGF.A ) will be looking to turn around its return on capital

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When researching stocks for investing, what can tell us that a company is in decline?Typically, we see a drop in return Capital employed (ROCE) and decline quantity capital employed. Ultimately, that means the company is earning less per dollar invested, and among other things, it’s shrinking its employed capital base.In view of this, at first glance lionsgate entertainment (NYSE ticker symbol: LGF.A), we found some indications that it might be struggling, so let’s investigate.

Return on Capital Employed (ROCE): What is it?

To clarify, if you’re not sure, ROCE is a measure of how much pre-tax income a company receives (expressed as a percentage) from the capital invested in its business. Lions Gate Entertainment is calculated as:

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

0.006 = USD 29 million ÷ (US$7.4b – US$2.6b) (Based on last 12 months to March 2023).

therefore, Lionsgate has an ROCE of 0.6%. That’s a low rate of return in absolute terms, and it’s below the entertainment industry average of 12%.

Check out our latest analysis for Lionsgate Entertainment

one year

one year

In the graph above, we measure Lionsgate’s previous ROCE versus its previous performance, but the future is arguably more important.If you like, you can check out analyst forecasts for Lions Gate Entertainment here for free.

So what’s the ROCE trend for Lions Gate Entertainment?

The return trend generated by Lions Gate Entertainment has raised some concerns. More specifically, today’s ROCE was 5.3% five years ago, but it has now dropped to 0.6%. Also worrying is the 26% reduction in capital deployed in the business over the same period. When you see both ROCE and capital employed are decreasing, it can often be a sign that mature and shrinking businesses may be in structural decline. Typically, businesses exhibiting these characteristics tend not to grow exponentially in the long term, since they have statistically already gone through the growth phase of their life cycle.

Our Thoughts on Lions Gate Entertainment’s ROCE

In short, lower returns and reduced use of capital in the business do not give us confidence. It’s no surprise, then, that the stock is down 51% over the past five years, so it looks like investors are recognizing the changes. Since the underlying trends in these areas aren’t great, we’ll consider looking elsewhere.

Like most companies, Lionsgate has some risks, we found 1 warning sign You should know.

While Lions Gate Entertainment may not have the highest return right now, we’ve compiled a list of companies that currently have a return on equity of over 25%.check it out free List here.

Have feedback on this article? Concerned about content? keep in touch Contact us directly. Alternatively, email the editorial team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.

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