Meinian Onehealth Healthcare Holdings (SZSE:002044) Is Finding It Tricky To Allocate Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Meinian Onehealth Healthcare Holdings (SZSE:002044), so let's see why.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Meinian Onehealth Healthcare Holdings is:

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

0.088 = CN¥971m ÷ (CN¥19b - CN¥8.0b) (Based on the trailing twelve months to September 2024).

Therefore, Meinian Onehealth Healthcare Holdings has an ROCE of 8.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.0%.

View our latest analysis for Meinian Onehealth Healthcare Holdings

In the above chart we have measured Meinian Onehealth Healthcare Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Meinian Onehealth Healthcare Holdings .

What The Trend Of ROCE Can Tell Us

In terms of Meinian Onehealth Healthcare Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. 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 Meinian Onehealth Healthcare Holdings to turn into a multi-bagger.

On a separate but related note, it's important to know that Meinian Onehealth Healthcare Holdings has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, it's unfortunate that Meinian Onehealth Healthcare Holdings is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 45% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Meinian Onehealth Healthcare Holdings, we've discovered 1 warning sign that you should be aware of.

While Meinian Onehealth Healthcare Holdings 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.

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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.