Investors Could Be Concerned With Alfresa Holdings' (TSE:2784) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Alfresa Holdings (TSE:2784) we aren't filled with optimism, but let's investigate further.

What Is 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. 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)

0.068 = JP¥37b ÷ (JP¥1.5t - JP¥914b) (Based on the trailing twelve months to September 2024).

Thus, Alfresa Holdings has an ROCE of 6.8%. On its own, that's a low figure but it's around the 7.9% average generated by the Healthcare industry.

Check out 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're interested, you can view the analysts predictions in our free analyst report for Alfresa Holdings .

So How Is Alfresa Holdings' ROCE Trending?

In terms of Alfresa Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.8%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Alfresa Holdings to turn into a multi-bagger.

On a side note, Alfresa Holdings' current liabilities are still rather high at 62% of total assets. 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.

Our Take On Alfresa Holdings' ROCE

In summary, it's unfortunate that Alfresa Holdings is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 5.1% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Alfresa Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

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

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

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.