Investors Could Be Concerned With Studio City International Holdings' (NYSE:MSC) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Studio City International Holdings (NYSE:MSC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Studio City International Holdings is:

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

0.005 = US$15m ÷ (US$3.2b - US$116m) (Based on the trailing twelve months to March 2024).

Therefore, Studio City International Holdings has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.

See our latest analysis for Studio City International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Studio City International Holdings' ROCE against it's prior returns. 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.

What Can We Tell From Studio City International Holdings' ROCE Trend?

On the surface, the trend of ROCE at Studio City International Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 5.1% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Studio City International Holdings has decreased its current liabilities to 3.6% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Studio City International Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Studio City International Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 64% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 3 warning signs with Studio City International Holdings (at least 2 which are potentially serious) , and understanding them would certainly be useful.

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.