Yahoo Finance Returns On Capital At Alliance Healthcare Group (Catalist:MIJ) Paint A Concerning Picture
What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Alliance Healthcare Group (Catalist:MIJ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. The formula for this calculation on Alliance Healthcare Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = S$2.5m ÷ (S$65m - S$31m) (Based on the trailing twelve months to June 2023).
Thus, Alliance Healthcare Group has an ROCE of 7.6%. On its own, that's a low figure but it's around the 8.6% average generated by the Healthcare industry.
View our latest analysis for Alliance Healthcare Group
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 want to delve into the historical earnings, revenue and cash flow of Alliance Healthcare Group, check out these free graphs here.
What Does the ROCE Trend For Alliance Healthcare Group Tell Us?
On the surface, the trend of ROCE at Alliance Healthcare Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.6% from 35% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, Alliance Healthcare Group has decreased its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.
The Key Takeaway
In summary, Alliance Healthcare Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last three years has been flat. Therefore based on the analysis done in this article, we don't think Alliance Healthcare Group has the makings of a multi-bagger.
If you'd like to know more about Alliance Healthcare Group, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.
While Alliance Healthcare Group 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.
