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Is There More Growth In Store For Scientific Games' (NASDAQ:SGMS) Returns On Capital?

Simply Wall St
·3 min read

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Scientific Games (NASDAQ:SGMS) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Scientific Games is:

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

0.074 = US$497m ÷ (US$7.5b - US$735m) (Based on the trailing twelve months to March 2020).

Therefore, Scientific Games has an ROCE of 7.4%. Even though it's in line with the industry average of 6.9%, it's still a low return by itself.

View our latest analysis for Scientific Games


In the above chart we have a measured Scientific Games' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Scientific Games Tell Us?

We're pretty happy with how the ROCE has been trending at Scientific Games. The figures show that over the last five years, returns on capital have grown by 1,005%. The company is now earning US$0.07 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 26% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

What We Can Learn From Scientific Games' ROCE

In summary, it's great to see that Scientific Games has been able to turn things around and earn higher returns on lower amounts of capital. Considering the stock has delivered 0.5% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Like most companies, Scientific Games does come with some risks, and we've found 1 warning sign that you should be aware of.

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

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.