Stock Analysis

The Returns On Capital At SkyCity Entertainment Group (NZSE:SKC) Don't Inspire Confidence

Published
NZSE:SKC
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at SkyCity Entertainment Group (NZSE:SKC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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)

0.0083 = NZ$21m ÷ (NZ$2.7b - NZ$269m) (Based on the trailing twelve months to June 2022).

So, SkyCity Entertainment Group has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.5%.

Check out the opportunities and risks within the NZ Hospitality industry.

roce
NZSE:SKC Return on Capital Employed December 8th 2022

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For SkyCity Entertainment Group Tell Us?

When we looked at the ROCE trend at SkyCity Entertainment Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.8% from 10% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

What We Can Learn From SkyCity Entertainment Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for SkyCity Entertainment Group have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 23% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you're still interested in SkyCity Entertainment Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether SkyCity Entertainment Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis