These Metrics Don't Make National HealthCare (NYSEMKT:NHC) Look Too Strong

What underlying fundamental trends can indicate that a company might be in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into National HealthCare (NYSEMKT:NHC), we weren't too upbeat about how things were going.

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 National HealthCare, this is the formula:

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

0.038 = US$41m ÷ (US$1.3b - US$260m) (Based on the trailing twelve months to September 2020).

Thus, National HealthCare has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.

View our latest analysis for National HealthCare

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating National HealthCare's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about National HealthCare, given the returns are trending downwards. To be more specific, the ROCE was 7.7% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on National HealthCare becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that National HealthCare is generating lower returns from the same amount of capital. However the stock has delivered a 41% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, National HealthCare does come with some risks, and we've found 4 warning signs that you should be aware of.

While National HealthCare 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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