Herbalife Nutrition (NYSE:HLF) Could Become A Multi-Bagger
If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Herbalife Nutrition (NYSE:HLF) looks great, so lets see what the trend can tell us.
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. To calculate this metric for Herbalife Nutrition, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = US$679m ÷ (US$2.8b - US$1.1b) (Based on the trailing twelve months to March 2022).
Thus, Herbalife Nutrition has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.
Check out our latest analysis for Herbalife Nutrition
In the above chart we have measured Herbalife Nutrition's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Herbalife Nutrition.
So How Is Herbalife Nutrition's ROCE Trending?
Herbalife Nutrition has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 154%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 34% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Bottom Line On Herbalife Nutrition's ROCE
From what we've seen above, Herbalife Nutrition has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 26% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Herbalife Nutrition does have some risks though, and we've spotted 2 warning signs for Herbalife Nutrition that you might be interested in.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
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