These Return Metrics Don't Make SkyCity Entertainment Group (NZSE:SKC) Look Too Strong

By
Simply Wall St
Published
March 31, 2021
NZSE:SKC
Source: Shutterstock

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at SkyCity Entertainment Group (NZSE:SKC), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.00068 = NZ$1.6m ÷ (NZ$2.7b - NZ$329m) (Based on the trailing twelve months to December 2020).

So, SkyCity Entertainment Group has an ROCE of 0.07%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.5%.

Check out our latest analysis for SkyCity Entertainment Group

roce
NZSE:SKC Return on Capital Employed April 1st 2021

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, you can check out the forecasts from the analysts covering SkyCity Entertainment Group here for free.

What The Trend Of ROCE Can Tell Us

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 11% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. 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.

The Key Takeaway

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 10% 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.

One more thing, we've spotted 1 warning sign facing SkyCity Entertainment Group that you might find interesting.

While SkyCity Entertainment Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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