The Trends At Galaxy Entertainment Group (HKG:27) That You Should Know About

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Galaxy Entertainment Group (HKG:27) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Galaxy Entertainment Group is:

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

0.037 = HK$2.5b ÷ (HK$94b - HK$26b) (Based on the trailing twelve months to June 2020).

Therefore, Galaxy Entertainment Group has an ROCE of 3.7%. Even though it's in line with the industry average of 3.5%, it's still a low return by itself.

See our latest analysis for Galaxy Entertainment Group

Above you can see how the current ROCE for Galaxy Entertainment Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Galaxy Entertainment Group here for free.

What Can We Tell From Galaxy Entertainment Group's ROCE Trend?

In terms of Galaxy Entertainment Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Galaxy Entertainment Group's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 210% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Galaxy Entertainment Group does have some risks though, and we've spotted 1 warning sign for Galaxy Entertainment Group that you might be interested in.

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. 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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