When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Studio City International Holdings (NYSE:MSC), the trends above didn't look too great.
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. 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)
0.018 = US$50m ÷ (US$3.0b - US$153m) (Based on the trailing twelve months to September 2024).
Thus, Studio City International Holdings has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.5%.
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'd like to look at how Studio City International Holdings has performed in the past in other metrics, you can view this free graph of Studio City International Holdings' past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Studio City International Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.2%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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.
What We Can Learn From Studio City International Holdings' ROCE
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. Long term shareholders who've owned the stock over the last five years have experienced a 68% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Studio City International Holdings does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.
While Studio City International Holdings 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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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.
