Aveanna Healthcare Holdings' (NASDAQ:AVAH) Returns On Capital Not Reflecting Well On The Business

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Aveanna Healthcare Holdings (NASDAQ:AVAH), so let's see why.

What Is 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. The formula for this calculation on Aveanna Healthcare Holdings is:

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

0.044 = US$68m ÷ (US$1.9b - US$361m) (Based on the trailing twelve months to October 2022).

So, Aveanna Healthcare Holdings has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

See our latest analysis for Aveanna Healthcare Holdings

Above you can see how the current ROCE for Aveanna Healthcare Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Aveanna Healthcare Holdings.

The Trend Of ROCE

There is reason to be cautious about Aveanna Healthcare Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.9% that they were earning three years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 three years. If these trends continue, we wouldn't expect Aveanna Healthcare Holdings to turn into a multi-bagger.

The Bottom Line On Aveanna Healthcare 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. We expect this has contributed to the stock plummeting 89% during the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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

While Aveanna 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.