Stock Analysis

Six Flags Entertainment (NYSE:SIX) Could Be Struggling To Allocate Capital

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What financial metrics can indicate to us that a company is maturing or even 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Six Flags Entertainment (NYSE:SIX), we weren't too hopeful.

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

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. The formula for this calculation on Six Flags Entertainment is:

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

0.17 = US$385m ÷ (US$2.7b - US$434m) (Based on the trailing twelve months to January 2023).

So, Six Flags Entertainment has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10% generated by the Hospitality industry.

See our latest analysis for Six Flags Entertainment

NYSE:SIX Return on Capital Employed March 10th 2023

In the above chart we have measured Six Flags Entertainment'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 Six Flags Entertainment.

What Can We Tell From Six Flags Entertainment's ROCE Trend?

We are a bit worried about the trend of returns on capital at Six Flags Entertainment. Unfortunately the returns on capital have diminished from the 22% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Six Flags Entertainment to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Six Flags Entertainment is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 51% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with Six Flags Entertainment and understanding these should be part of your investment process.

While Six Flags Entertainment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

What are the risks and opportunities for Six Flags Entertainment?

Six Flags Entertainment Corporation owns and operates regional theme and waterparks under the Six Flags name.

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  • Trading at 39.7% below our estimate of its fair value

  • Earnings are forecast to grow 20.8% per year


  • Interest payments are not well covered by earnings

  • Negative shareholders equity

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