Alfresa Holdings' (TSE:2784) Returns Have Hit A Wall

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Alfresa Holdings (TSE:2784), it didn't seem to tick all of these boxes.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Alfresa Holdings, this is the formula:

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

0.071 = JP¥40b ÷ (JP¥1.6t - JP¥1.0t) (Based on the trailing twelve months to December 2024).

So, Alfresa Holdings has an ROCE of 7.1%. In absolute terms, that's a low return but it's around the Healthcare industry average of 8.9%.

See our latest analysis for Alfresa Holdings

In the above chart we have measured Alfresa Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Alfresa Holdings for free.

So How Is Alfresa Holdings' ROCE Trending?

Things have been pretty stable at Alfresa Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Alfresa Holdings to be a multi-bagger going forward.

Another thing to note, Alfresa Holdings has a high ratio of current liabilities to total assets of 65%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In a nutshell, Alfresa Holdings has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 9.7% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, Alfresa Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.