MRK Holdings (TSE:9980) Could Be Struggling To Allocate Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into MRK Holdings (TSE:9980), the trends above didn't look too great.

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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. Analysts use this formula to calculate it for MRK Holdings:

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

0.04 = JP¥605m ÷ (JP¥20b - JP¥4.4b) (Based on the trailing twelve months to December 2024).

So, MRK Holdings has an ROCE of 4.0%. Even though it's in line with the industry average of 4.1%, it's still a low return by itself.

View our latest analysis for MRK Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for MRK Holdings' ROCE against it's prior returns. If you'd like to look at how MRK Holdings has performed in the past in other metrics, you can view this free graph of MRK Holdings' past earnings, revenue and cash flow .

What Does the ROCE Trend For MRK Holdings Tell Us?

In terms of MRK Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.3% 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on MRK Holdings becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that MRK Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 47% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

MRK Holdings does have some risks though, and we've spotted 1 warning sign for MRK Holdings that you might be interested in.

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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.