SkyCity Entertainment Group (NZSE:SKC) Is Finding It Tricky To Allocate Its Capital

When researching a stock for investment, what can tell us that the company is 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, SkyCity Entertainment Group (NZSE:SKC) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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)

0.073 = NZ$183m ÷ (NZ$2.9b - NZ$348m) (Based on the trailing twelve months to June 2023).

So, SkyCity Entertainment Group has an ROCE of 7.3%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 5.8%.

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.

So How Is SkyCity Entertainment Group's ROCE Trending?

There is reason to be cautious about SkyCity Entertainment Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.8% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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.

What We Can Learn From SkyCity 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. It should come as no surprise then that the stock has fallen 43% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing SkyCity Entertainment Group we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.