Yahoo Finance SkyCity Entertainment Group (NZSE:SKC) Will Be Hoping To Turn Its Returns On Capital Around
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at SkyCity Entertainment Group (NZSE:SKC), so let's see why.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)
0.064 = NZ$156m ÷ (NZ$2.7b - NZ$321m) (Based on the trailing twelve months to December 2022).
Thus, SkyCity Entertainment Group has an ROCE of 6.4%. On its own, that's a low figure but it's around the 7.1% average generated by the Hospitality industry.
View our latest analysis for SkyCity Entertainment Group
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?
We are a bit worried about the trend of returns on capital at SkyCity Entertainment Group. To be more specific, the ROCE was 9.5% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Bottom Line
In summary, it's unfortunate that SkyCity Entertainment Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 31% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing to note, we've identified 3 warning signs with SkyCity Entertainment Group and understanding them should be part of your investment process.
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.
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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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