Here's What's Concerning About Studio City International Holdings' (NYSE:MSC) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Studio City International Holdings (NYSE:MSC), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Studio City International Holdings, this is the formula:

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

0.013 = US$37m ÷ (US$3.1b - US$161m) (Based on the trailing twelve months to June 2024).

So, Studio City International Holdings has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.

View our latest analysis for Studio City International Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Studio City International Holdings.

So How Is Studio City International Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at Studio City International Holdings. About five years ago, returns on capital were 5.6%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Studio City International Holdings becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Studio City International Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 66% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Studio City International Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

While Studio City International Holdings 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.