Investors Met With Slowing Returns on Capital At SkyCity Entertainment Group (NZSE:SKC)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after investigating SkyCity Entertainment Group (NZSE:SKC), we don’t think it’s current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for SkyCity Entertainment Group, this is the formula:

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

0.077 = NZ$174m ÷ (NZ$2.8b – NZ$506m) (Based on the trailing twelve months to June 2024).

So, SkyCity Entertainment Group has an ROCE of 7.7%. On its own, that’s a low figure but it’s around the 9.3% average generated by the Hospitality industry.

View 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 analyst report for SkyCity Entertainment Group .

The Trend Of ROCE

There hasn’t been much to report for SkyCity Entertainment Group’s returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn’t reinvesting in itself, so it’s plausible that it’s past the growth phase. So unless we see a substantial change at SkyCity Entertainment Group in terms of ROCE and additional investments being made, we wouldn’t hold our breath on it being a multi-bagger. That being the case, it makes sense that SkyCity Entertainment Group has been paying out 74% of its earnings to its shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

The Bottom Line

We can conclude that in regards to SkyCity Entertainment Group’s returns on capital employed and the trends, there isn’t much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 59% in the last five years. Therefore based on the analysis done in this article, we don’t think SkyCity Entertainment Group has the makings of a multi-bagger.

Story continues

If you want to continue researching SkyCity Entertainment Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.