McKesson Europe (HMSE:CLS1) Will Be Looking To Turn Around Its Returns
What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into McKesson Europe (HMSE:CLS1), the trends above didn't look too great.
Return On Capital Employed (ROCE): What Is It?
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 McKesson Europe is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = €69m ÷ (€5.1b - €2.3b) (Based on the trailing twelve months to March 2022).
Therefore, McKesson Europe has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 5.7%.
View our latest analysis for McKesson Europe
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 McKesson Europe'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 McKesson Europe, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.1% that they were earning five 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 five years. If these trends continue, we wouldn't expect McKesson Europe to turn into a multi-bagger.
On a side note, McKesson Europe has done well to pay down its current liabilities to 45% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.
Our Take On McKesson Europe's ROCE
In summary, it's unfortunate that McKesson Europe is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 11% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing, we've spotted 1 warning sign facing McKesson Europe that you might find interesting.
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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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.
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