Slowing yields at Six Flags Entertainment (NYSE: SIX) leaves little room for excitement
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will display two trends; first growth to return to on capital employed (ROCE) and on the other hand, an increase quantity capital employed. Simply put, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. That said, from the first glance at Six Flags Entertainment (NYSE: SIX) We’re not jumping from our chairs on the yield trend, but taking a closer look.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the âreturnâ (profit before tax) that a business generates on capital employed in its business. To calculate this metric for Six Flags Entertainment, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.11 = US $ 271 million Ã· (US $ 3.1 billion – US $ 522 million) (Based on the last twelve months up to October 2021).
Therefore, Six Flags Entertainment has a ROCE of 11%. In absolute terms, this is a fairly normal return, and it is somewhat close to the hospitality industry average of 9.0%.
NYSE: SIX Return on Capital Employed December 27, 2021
In the graph above, we’ve measured Six Flags Entertainment’s past ROCE versus past performance, but arguably the future is more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What is the trend for returns?
Over the past five years, the ROCE and capital employed of Six Flags Entertainment have remained broadly stable. Companies with these characteristics tend to be mature and stable operations as they are past the growth phase. So unless we see a substantial change at Six Flags Entertainment in terms of ROCE and additional investment, we won’t be holding our breath that this is a multi-bagger.
The key to take away
In a nutshell, Six Flags Entertainment has walked with the same returns for the same amount of capital over the past five years. Given that the stock has lost 15% over the past five years, investors may not be overly optimistic that this trend will improve either. Either way, the stock lacks the characteristics of a multi-bagger discussed above, so if that’s what you’re looking for, we think you might have better luck elsewhere.
One last note, you should inquire about the 3 warning signs we spotted him with Six Flags Entertainment (including 2 which are a little unpleasant).
While Six Flags Entertainment doesn’t get the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
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