These feedback measures don’t make McKesson Europe (HMSE:CLS1) look too strong
If we are looking to avoid a declining business, what are the trends that can give us advance warning? When we see a decline to return to on capital employed (ROCE) in connection with a decrease base capital employed, this is often how a mature company shows signs of aging. Basically, the company earns less on its investments and it also reduces its total assets. On that note, looking at McKesson Europe (HMSE:CLS1), we weren’t too optimistic about how things were going.
Understanding return on capital employed (ROCE)
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for McKesson Europe:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.023 = €74m ÷ (€7.0bn – €3.9bn) (Based on the last twelve months to March 2021).
So, McKesson Europe posted a ROCE of 2.3%. In absolute terms, this is a weak return and it is also below the healthcare industry average of 6.5%.
See our latest analysis for McKesson Europe
Historical performance is a great starting point when researching a stock. So above you can see the gauge of McKesson Europe’s ROCE compared to its past returns. If you want to see how McKesson Europe has performed in the past in other metrics, you can see this free chart of past profits, revenue and cash flow.
What is the return trend?
In terms of McKesson Europe’s historic ROCE trend, it’s not fantastic. To be more specific, today’s ROCE was 9.5% five years ago, but has since fallen to 2.3%. On top of that, the company uses 26% less capital in its operations. The fact that both are declining is an indication that the company is going through tough times. Generally, companies with these characteristics are not the ones that tend to multiply over the long term, because statistically speaking, they have already gone through the growth phase of their life cycle.
Another thing to note, McKesson Europe has a high ratio of current liabilities to total assets of 55%. This may entail certain risks, since the business is essentially dependent on its suppliers or other types of short-term creditors. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
Seeing McKesson Europe reduce capital employed in the business at the same time as diminishing returns is worrying. Despite the concerning underlying trends, the stock has actually gained 0.09% over the past five years, so investors may be expecting the trends to reverse. Either way, we’re not big fans of current trends, so we think you might find better investments elsewhere.
However, McKesson Europe involves certain risks, we have observed 2 warning signs in our investment analysis, and 1 of them does not suit us too much…
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.