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What Nu Skin Enterprises' (NYSE:NUS) Returns On Capital Can Tell Us

Simply Wall St
·3 min read

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Nu Skin Enterprises (NYSE:NUS) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Nu Skin Enterprises is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.17 = US$219m ÷ (US$1.8b - US$485m) (Based on the trailing twelve months to June 2020).

So, Nu Skin Enterprises has an ROCE of 17%. That's a pretty standard return and it's in line with the industry average of 17%.

View our latest analysis for Nu Skin Enterprises

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In the above chart we have measured Nu Skin Enterprises' 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 Nu Skin Enterprises.

So How Is Nu Skin Enterprises' ROCE Trending?

There is reason to be cautious about Nu Skin Enterprises, given the returns are trending downwards. About five years ago, returns on capital were 28%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nu Skin Enterprises becoming one if things continue as they have.

Our Take On Nu Skin Enterprises' ROCE

In summary, it's unfortunate that Nu Skin Enterprises is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 70% return over the last five years, so investors appear very optimistic. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for Nu Skin Enterprises you'll probably want to know about.

While Nu Skin Enterprises may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.