Today we'll look at Nu Skin Enterprises, Inc. (NYSE:NUS) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.'
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Nu Skin Enterprises:
0.23 = US$320m ÷ (US$1.8b - US$415m) (Based on the trailing twelve months to June 2019.)
So, Nu Skin Enterprises has an ROCE of 23%.
Does Nu Skin Enterprises Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Nu Skin Enterprises's ROCE appears to be substantially greater than the 19% average in the Personal Products industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Nu Skin Enterprises's ROCE in absolute terms currently looks quite high.
In our analysis, Nu Skin Enterprises's ROCE appears to be 23%, compared to 3 years ago, when its ROCE was 17%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Nu Skin Enterprises's past growth compares to other companies.
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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Nu Skin Enterprises's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Nu Skin Enterprises has total liabilities of US$415m and total assets of US$1.8b. Therefore its current liabilities are equivalent to approximately 23% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
The Bottom Line On 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. There might be better investments than Nu Skin Enterprises out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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