Allscripts Healthcare Solutions (NASDAQ:MDRX) Will Be Looking To Turn Around Its Returns

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Allscripts Healthcare Solutions (NASDAQ:MDRX), we weren't too hopeful.

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 Allscripts Healthcare Solutions, this is the formula:

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

0.013 = US$25m ÷ (US$2.5b - US$596m) (Based on the trailing twelve months to June 2021).

So, Allscripts Healthcare Solutions has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 8.1%.

View our latest analysis for Allscripts Healthcare Solutions

In the above chart we have measured Allscripts Healthcare Solutions' 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Allscripts Healthcare Solutions Tell Us?

The trend of returns that Allscripts Healthcare Solutions is generating are raising some concerns. To be more specific, today's ROCE was 1.8% five years ago but has since fallen to 1.3%. In addition to that, Allscripts Healthcare Solutions is now employing 37% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On Allscripts Healthcare Solutions' ROCE

In summary, it's unfortunate that Allscripts Healthcare Solutions is shrinking its capital base and also generating lower returns. Investors must expect better things on the horizon though because the stock has risen 29% in 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.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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