Returns On Capital Signal Difficult Times Ahead For Healthcare Services Group (NASDAQ:HCSG)

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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Healthcare Services Group (NASDAQ:HCSG), we weren't too hopeful.

Understanding 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. The formula for this calculation on Healthcare Services Group is:

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

0.064 = US$35m ÷ (US$722m - US$182m) (Based on the trailing twelve months to September 2022).

Thus, Healthcare Services Group has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.1%.

Check out our latest analysis for Healthcare Services Group

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Above you can see how the current ROCE for Healthcare Services Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Healthcare Services Group.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Healthcare Services Group. About five years ago, returns on capital were 26%, however they're now substantially lower than that as we saw above. 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. If these trends continue, we wouldn't expect Healthcare Services Group to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Healthcare Services Group is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 70% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Healthcare Services Group we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

While Healthcare Services 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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