When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This reveals that the company isn’t compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Six Flags Entertainment (NYSE:SIX), we weren’t too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Six Flags Entertainment, this is the formula:

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

0.056 = US$146m ÷ (US$3.0b – US$380m) (Based on the trailing twelve months to June 2020).

So, Six Flags Entertainment has an ROCE of 5.6%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 6.1%.

Check out our latest analysis for Six Flags Entertainment

Above you can see how the current ROCE for Six Flags Entertainment compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Six Flags Entertainment here for free.

So How Is Six Flags Entertainment’s ROCE Trending?

We are a bit worried about the trend of returns on capital at Six Flags Entertainment. To be more specific, the ROCE was 9.6% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Six Flags Entertainment becoming one if things continue as they have.

The Bottom Line

In summary, it’s unfortunate that Six Flags Entertainment is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 37% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.

Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 2 warning signs for Six Flags Entertainment (of which 1 is significant!) that you should know about.

While Six Flags Entertainment 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.

This article by Simply Wall St is general in nature. 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.

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