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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into SkyCity Entertainment Group (NZSE:SKC), we weren't too upbeat about how things were going.
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)
0.057 = NZ$147m ÷ (NZ$2.8b - NZ$205m) (Based on the trailing twelve months to December 2024).
So, SkyCity Entertainment Group has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.9%.
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 analyst report for SkyCity Entertainment Group .
What Does the ROCE Trend For SkyCity Entertainment Group Tell Us?
There is reason to be cautious about SkyCity Entertainment Group, given the returns are trending downwards. To be more specific, the ROCE was 8.3% 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. If these trends continue, we wouldn't expect SkyCity Entertainment Group to turn into a multi-bagger.
The Bottom Line On SkyCity Entertainment Group's ROCE
In summary, it's unfortunate that SkyCity Entertainment Group is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.