(FORTUNE Magazine) – On the surface, American media companies appear to have turned in award-winning performances over the past year. Shares of Time Warner (the parent of FORTUNE's publisher), for instance, have surged 26% as the company paid down debt. CBS parent Viacom reported such solid first-quarter earnings--including a 21% increase in ad revenue--that president Mel Karmazin pronounced himself "extraordinarily optimistic" about 2004. And in late April cable powerhouse Comcast said it had turned a $65 million profit for the first quarter, reversing a loss a year ago. Although CEO Brian Roberts announced that Comcast would drop its $48 billion bid for Disney--which had helped push shares of the Mouse House up 37% over the past 52 weeks--he said the company would look at buying Adelphia Communications. So if media companies are feeling healthy and ready to spend, should investors go on their own media buying binge?

Not so fast. In fact, according to a new study by New York consulting firm Stern Stewart & Co., media's marquee names share a rather shameful distinction: They rank among the biggest destroyers of shareholder value in U.S. industry. Stern Stewart divided the market into 20 industry groups and analyzed them based on "economic valued added," a formula the firm created to measure companies' efficiency at turning a profit. It found that the media sector was third from the bottom in 2003. And the sector's trend line is headed down.

Investors tend to focus on earnings and free cash flow when evaluating a stock. But EVA actually offers a clearer picture of whether a company is creating or eroding wealth for its owners than either measure. The reason comes down to the equity capital that companies use to generate earnings. That equity may look free because, unlike debt, it carries no accounting charge. But it isn't. When a company spends its equity on acquisitions, for example, current shareholders pay in the form of dilution. So EVA rightly assumes a charge for that equity capital. And over time, so does the market: The direction of a company's stock price almost always correlates to the trajectory of its EVA.

Look at the performance of the big-media stocks. Although some (like the aforementioned Time Warner and Disney) have rallied recently, the returns in the sector overall have been almost universally miserable during the past five years (see table). And it's the media world's profligate use of capital--mostly an addiction to overpriced acquisitions--that is most responsible.

To better understand why, let's first take a deeper look at how to arrive at a company's EVA. Stern Stewart begins by calculating a company's net operating profit after tax, or NOPAT (roughly, net earnings before interest expense). Then it adds up all the equity and debt capital the company raised. Stern Stewart, as we said, levies a charge on that capital. That charge is a weighted average of the cost of debt (prevailing interest rates on corporate bonds) and the cost of equity, and it reflects the return investors demand for taking the big risks of owning these stocks. Stern Stewart then subtracts the capital charge from NOPAT. The result is EVA. If a company's EVA is positive, it's earning more than its cost of capital. And if the EVA figure is highly positive or headed sharply up (even while it's still negative), the stock price should rise briskly. When EVA is mired in the minus zone, investors should generally beware.

The Stern Stewart numbers clearly show that although the earnings at big media companies often look great, they're using far too much capital to generate those big profits. Take Comcast. It posted a seemingly impressive $978 million in NOPAT for the 12 months ended Sept. 30. But the cable powerhouse needed an epic $66 billion in capital to generate that income. With a cost of capital of 8.8%, Comcast had to generate profits of $5.8 billion, not $978 million, to enrich shareholders. Hence, it posted negative EVA of $4.9 billion. In other words, Comcast destroyed nearly $5 billion in shareholder value in 12 months.

The biggest hit to EVA at media companies has come from vastly overpaying for acquisitions and expansion. They have systematically piled on mountains of capital in the form of both debt and equity without a prayer of generating big enough returns on their purchases to make them pay for shareholders. While AOL's purchase of Time Warner is widely reviled for its colossal pricetag, a host of other media deals have also been enormously dilutive. Disney was posting positive EVA until it overpaid in its $19 billion purchase of Cap Cities/ABC in 1996. And Viacom, in many ways financially healthy, is lugging almost $100 billion in capital, including $46 billion from its purchase of CBS in 2000.

The cable companies face two big problems: First, they paid far too much to expand their cable empires. Comcast, for example, offered $47 billion for AT&T Broadband in 2001, a giant $4,500 per subscriber. Second, they keep plowing billions into upgrading their systems, while satellite companies are now holding down prices. Of the TV companies, the best prospect by far is EchoStar, chiefly because satellite systems require far less capital to support them than cable. Though its EVA is still negative, it is improving mightily. No coincidence that its stock is up 220% over the past five years.

So why do many media companies still boast such big market caps? Clearly, investors expect that those underwater EVAs will turn positive, probably quite soon. That could happen, because the worldwide appetite for entertainment programming is exploding. But competition is likely to restrain profit growth, making it impossible to earn a hearty return on all the capital they've squandered. It will take a near miracle to turn media stocks into good buys. Smart investors shouldn't bet on miracles.