What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount or capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Nu Skin Enterprises (NYSE:NUS), we don’t think it’s current trends fit the mold of a multi-bagger.
What Is 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. To calculate this metric for Nu Skin Enterprises, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = US$192m ÷ (US$1.8b – US$366m) (Based on the trailing twelve months to September 2022).
Therefore, Nu Skin Enterprises has an ROCE of 14%. That’s a relatively normal return on capital, and it’s around the 15% generated by the Personal Products industry.
Check out our latest analysis for Nu Skin Enterprises
Above you can see how the current ROCE for Nu Skin Enterprises 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 Nu Skin Enterprises.
What Can We Tell From Nu Skin Enterprises’ ROCE Trend?
In terms of Nu Skin Enterprises’ historical ROCE movements, the trend isn’t fantastic. To be more specific, ROCE has fallen from 21% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it’s actually producing a lower return – “less bang for their buck” per se.
The Bottom Line On Nu Skin Enterprises’ ROCE
In summary, we’re somewhat concerned by Nu Skin Enterprises’ diminishing returns on increasing amounts of capital. Long term shareholders who’ve owned the stock over the last five years have experienced a 29% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a separate note, we’ve found 3 warning signs for Nu Skin Enterprises you’ll probably want to know about.
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.