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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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Ergo, when we looked at the ROCE trends at Herbalife Nutrition (NYSE:HLF), we liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Herbalife Nutrition:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.33 = US$641m ÷ (US$3.1b - US$1.1b) (Based on the trailing twelve months to December 2020).
Thus, Herbalife Nutrition has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 12%.
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.
How Are Returns Trending?
Herbalife Nutrition deserves to be commended in regards to it's returns. The company has consistently earned 33% for the last five years, and the capital employed within the business has risen 35% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
What We Can Learn From Herbalife Nutrition's ROCE
Herbalife Nutrition has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has followed suit returning a meaningful 46% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One final note, you should learn about the 3 warning signs we've spotted with Herbalife Nutrition (including 1 which is a bit concerning) .
Herbalife Nutrition is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
This article by Simply Wall St is general in nature. 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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