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What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at SkyCity Entertainment Group (NZSE:SKC), so let's see why.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on SkyCity Entertainment Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00068 = NZ$1.6m ÷ (NZ$2.7b - NZ$329m) (Based on the trailing twelve months to December 2020).
So, SkyCity Entertainment Group has an ROCE of 0.07%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.5%.
In the above chart we have measured SkyCity Entertainment Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SkyCity Entertainment Group.
What Can We Tell From SkyCity Entertainment Group's ROCE Trend?
There is reason to be cautious about SkyCity Entertainment Group, given the returns are trending downwards. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. 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 SkyCity Entertainment Group becoming one if things continue as they have.
The Key Takeaway
In summary, it's unfortunate that SkyCity Entertainment Group is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing, we've spotted 1 warning sign facing SkyCity Entertainment Group that you might find interesting.
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.
This article by Simply Wall St is general in nature. 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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