To keep away from investing in a enterprise that is in decline, there’s just a few monetary metrics that may present early indications of getting old. Businesses in decline typically have two underlying traits, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the corporate is incomes much less on its investments and it’s also decreasing its complete property. In gentle of that, from a primary look at Six Flags Entertainment (NYSE:SIX), we have noticed some indicators that it may very well be struggling, so let’s examine.

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

For those that do not know, ROCE is a measure of an organization’s yearly pre-tax revenue (its return), relative to the capital employed within the enterprise. To calculate this metric for Six Flags Entertainment, that is the formulation:

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

0.18 = US$385m ÷ (US$2.7b – US$514m) (Based on the trailing twelve months to April 2023).

Therefore, Six Flags Entertainment has an ROCE of 18%. In absolute phrases, that is a passable return, however in comparison with the Hospitality trade common of 9.1% it is a lot better.

See our latest analysis for Six Flags Entertainment

In the above chart we have now measured Six Flags Entertainment’s prior ROCE towards its prior efficiency, however the future is arguably extra necessary. If you need, you may take a look at the forecasts from the analysts masking Six Flags Entertainment here for free.

SWOT Analysis for Six Flags Entertainment

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

There is motive to be cautious about Six Flags Entertainment, given the returns are trending downwards. About 5 years in the past, returns on capital have been 25%, nevertheless they’re now considerably decrease than that as we noticed above. On prime of that, it is price noting that the quantity of capital employed throughout the enterprise has remained comparatively regular. Companies that exhibit these attributes are inclined to not be shrinking, however they are often mature and dealing with stress on their margins from competitors. If these traits proceed, we would not anticipate Six Flags Entertainment to show right into a multi-bagger.

The Key Takeaway

All in all, the decrease returns from the identical quantity of capital employed aren’t precisely indicators of a compounding machine. Investors have not taken kindly to those developments, for the reason that inventory has declined 58% from the place it was 5 years in the past. With underlying traits that are not nice in these areas, we would think about wanting elsewhere.

Six Flags Entertainment does have some dangers although, and we have noticed 2 warning signs for Six Flags Entertainment that you simply is likely to be focused on.

While Six Flags Entertainment could not presently earn the very best returns, we have compiled an inventory of corporations that presently earn greater than 25% return on fairness. Check out this free list here.

Have suggestions on this text? Concerned in regards to the content material? Get in touch with us straight. Alternatively, e-mail editorial-team (at) simplywallst.com.

This article by Simply Wall St is basic in nature. We present commentary primarily based on historic information and analyst forecasts solely utilizing an unbiased methodology and our articles usually are not meant to be monetary recommendation. It doesn’t represent a suggestion to purchase or promote any inventory, and doesn’t take account of your goals, or your monetary state of affairs. We goal to convey you long-term targeted evaluation pushed by elementary information. Note that our evaluation could not issue within the newest price-sensitive firm bulletins or qualitative materials. Simply Wall St has no place in any shares talked about.