Galaxy Entertainment Group (HKG:27) Will Be Looking To Turn Around Its Returns

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Galaxy Entertainment Group (HKG:27), the trends above didn't look too great.

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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. Analysts use this formula to calculate it for Galaxy Entertainment Group:

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

0.099 = HK$7.9b ÷ (HK$95b - HK$15b) (Based on the trailing twelve months to December 2024).

So, Galaxy Entertainment Group has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 7.1% generated by the Hospitality industry, it's much better.

Check out our latest analysis for Galaxy Entertainment Group

In the above chart we have measured Galaxy Entertainment Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Galaxy Entertainment Group for free.

So How Is Galaxy Entertainment Group's ROCE Trending?

There is reason to be cautious about Galaxy Entertainment Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. 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 Galaxy Entertainment Group to turn into a multi-bagger.

What We Can Learn From Galaxy Entertainment Group's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 37% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Galaxy Entertainment Group does come with some risks, and we've found 2 warning signs that you should be aware of.

While Galaxy Entertainment Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.