Melco Resorts & Entertainment (NASDAQ:MLCO) Could Be At Risk Of Shrinking As A Company

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Melco Resorts & Entertainment (NASDAQ:MLCO), we weren't too upbeat about how things were going.

Understanding 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. Analysts use this formula to calculate it for Melco Resorts & Entertainment:

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

0.038 = US$273m ÷ (US$8.3b - US$1.1b) (Based on the trailing twelve months to December 2023).

Thus, Melco Resorts & Entertainment has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.6%.

View our latest analysis for Melco Resorts & Entertainment

Above you can see how the current ROCE for Melco Resorts & Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Melco Resorts & Entertainment .

How Are Returns Trending?

In terms of Melco Resorts & Entertainment's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.8%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn't expect Melco Resorts & Entertainment to turn into a multi-bagger.

On a side note, Melco Resorts & Entertainment has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Melco Resorts & Entertainment's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Unsurprisingly then, the stock has dived 72% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Melco Resorts & Entertainment you'll probably want to know about.

While Melco Resorts & Entertainment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.