The Returns On Capital At Alfresa Holdings (TSE:2784) Don't Inspire Confidence

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Alfresa Holdings (TSE:2784), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Alfresa Holdings:

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

0.073 = JP¥39b ÷ (JP¥1.5t - JP¥928b) (Based on the trailing twelve months to June 2024).

Thus, Alfresa Holdings has an ROCE of 7.3%. On its own, that's a low figure but it's around the 8.9% average generated by the Healthcare industry.

View our latest analysis for Alfresa Holdings

Above you can see how the current ROCE for Alfresa Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Alfresa Holdings for free.

How Are Returns Trending?

In terms of Alfresa Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.3% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Alfresa Holdings becoming one if things continue as they have.

Another thing to note, Alfresa Holdings has a high ratio of current liabilities to total assets of 63%. 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.

What We Can Learn From Alfresa Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 14% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Alfresa Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 2784 on our platform quite valuable.

While Alfresa 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.