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

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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. 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. Analysts use this formula to calculate it for SkyCity Entertainment Group:

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%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

See 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.

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

In terms of SkyCity Entertainment Group's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.8%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect SkyCity Entertainment Group to turn into a multi-bagger.

Our Take On SkyCity Entertainment Group's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 40% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

SkyCity Entertainment Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While SkyCity 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.