The Returns On Capital At Henry Schein (NASDAQ:HSIC) Don't Inspire Confidence
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. 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 Henry Schein (NASDAQ:HSIC), we weren't too hopeful.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Henry Schein, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$577m ÷ (US$7.8b - US$2.6b) (Based on the trailing twelve months to September 2020).
Thus, Henry Schein has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.
See our latest analysis for Henry Schein
In the above chart we have measured Henry Schein's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Henry Schein here for free.
What Can We Tell From Henry Schein's ROCE Trend?
In terms of Henry Schein's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Henry Schein to turn into a multi-bagger.
The Bottom Line On Henry Schein's ROCE
In summary, it's unfortunate that Henry Schein is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 16% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing, we've spotted 1 warning sign facing Henry Schein that you might find interesting.
While Henry Schein 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.
This article by Simply Wall St is general in nature. 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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