To avoid investing in a declining business, there are several financial indicators that can provide early signs of aging.When there is a decline return Increase in capital employed (ROCE) due to decrease base This is often how mature businesses show signs of aging. This ultimately means that companies earn less per dollar invested and, moreover, their employed capital base shrinks. If you look into that point, Melco Resorts & Entertainment (NASDAQ:MLCO), we weren't too optimistic about how things were going.
About Return on Capital Employed (ROCE)
In case you're not familiar, ROCE is a metric that measures how much pre-tax profit (as a percentage) a company earns on the capital invested in its business. Analysts use the following formula to calculate Melco Resorts & Entertainment's earnings.
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.038 = USD 273 million ÷ (USD 8.3 billion – USD 1.1 billion) (Based on the previous 12 months to December 2023).
therefore, Melco Resorts & Entertainment's ROCE is 3.8%. After all, this is a low rate of return, below the hospitality industry average of 9.6%.
Check out our latest analysis for Melco Resorts & Entertainment.
Above, you can see how Melco Resorts & Entertainment's current ROCE compares to its previous return on capital, but history can only tell us so much. To find out what analysts are predicting for the future, check out the free analyst report for Melco Resorts & Entertainment.
What are the return trends like?
When it comes to Melco Resorts & Entertainment's historic ROCE movement, this trend does not inspire confidence. About five years ago, the return on equity was 8.8%, but as we saw above, it's now much lower than that. In addition to that, it's worth noting that the amount of capital employed within the business has remained relatively stable. Revenues are falling and the business is using the same amount of assets, so this could suggest it's a mature business that hasn't grown much over the past five years. If this trend continues, don't expect Melco Resorts & Entertainment to turn into a multibagger.
As a side note, Melco Resorts & Entertainment has been doing well, paying down current liabilities to 13% of total assets. So we can attribute some of this to her reduced ROCE. This effectively means that suppliers and short-term creditors reduce funding for the business, reducing some of the risk factors. Some argue that because companies are now self-funding more of their operations, this makes them less efficient at generating ROCE.
Our take on Melco Resorts & Entertainment's ROCE
All in all, a lower return using the same amount of capital is not exactly a sign of compound interest. Unsurprisingly, investors are aware of these changes and don't like the company's outlook, with the stock plummeting 72% over the past five years. If so, consider looking elsewhere unless the underlying trends return to a more positive trajectory.
On another note, we discovered that 1 warning sign for Melco Resorts & Entertainment You probably want to know.
Melco Resorts & Entertainment isn't the highest earner, but check this out. free A list of companies with strong balance sheets and high return on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.