Are Nu Skin Enterprises, Inc.'s (NYSE:NUS) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
With its stock down 12% over the past three months, it is easy to disregard Nu Skin Enterprises (NYSE:NUS). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Nu Skin Enterprises' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Nu Skin Enterprises
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Nu Skin Enterprises is:
25% = US$230m ÷ US$936m (Based on the trailing twelve months to September 2021).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.25 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Nu Skin Enterprises' Earnings Growth And 25% ROE
To begin with, Nu Skin Enterprises has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 25% also portrays the company's ROE in a good light. Therefore, it looks like the high ROE is what probably supported Nu Skin Enterprises' modest 8.2% growth over the past five years.
Next, on comparing with the industry net income growth, we found that Nu Skin Enterprises' reported growth was lower than the industry growth of 28% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Nu Skin Enterprises''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Nu Skin Enterprises Using Its Retained Earnings Effectively?
While Nu Skin Enterprises has a three-year median payout ratio of 51% (which means it retains 49% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.
Additionally, Nu Skin Enterprises has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 37% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.
Summary
Overall, we feel that Nu Skin Enterprises certainly does have some positive factors to consider. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
