Today we’ll evaluate Nu Skin Enterprises, Inc. (NYSE:NUS) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Nu Skin Enterprises:
0.24 = US$274m ÷ (US$1.7b – US$428m) (Based on the trailing twelve months to September 2018.)
So, Nu Skin Enterprises has an ROCE of 24%.
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Is Nu Skin Enterprises’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Nu Skin Enterprises’s ROCE is around the 24% average reported by the Personal Products industry. Setting aside the comparison to its industry for a moment, Nu Skin Enterprises’s ROCE in absolute terms currently looks quite high.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Nu Skin Enterprises.
How Nu Skin Enterprises’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Nu Skin Enterprises has total assets of US$1.7b and current liabilities of US$428m. Therefore its current liabilities are equivalent to approximately 25% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.
What We Can Learn From Nu Skin Enterprises’s ROCE
This is good to see, and with such a high ROCE, Nu Skin Enterprises may be worth a closer look. You might be able to find a better buy than Nu Skin Enterprises. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.