Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we'll look at Nature's Sunshine Products, Inc. (NASDAQ:NATR) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
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 Nature's Sunshine Products:
0.078 = US$11m ÷ (US$209m - US$62m) (Based on the trailing twelve months to March 2019.)
So, Nature's Sunshine Products has an ROCE of 7.8%.
Is Nature's Sunshine Products's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Nature's Sunshine Products's ROCE appears meaningfully below the 19% average reported by the Personal Products industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Nature's Sunshine Products's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
As we can see, Nature's Sunshine Products currently has an ROCE of 7.8%, less than the 11% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. You can check if Nature's Sunshine Products has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Nature's Sunshine Products's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Nature's Sunshine Products has total assets of US$209m and current liabilities of US$62m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Nature's Sunshine Products's ROCE
If Nature's Sunshine Products continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than Nature's Sunshine Products. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.