The Returns On Capital At Mannatech (NASDAQ:MTEX) Don't Inspire Confidence

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Mannatech (NASDAQ:MTEX), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Mannatech is:

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

0.14 = US$4.5m ÷ (US$65m - US$32m) (Based on the trailing twelve months to December 2020).

So, Mannatech has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Personal Products industry average of 12%.

View our latest analysis for Mannatech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mannatech's ROCE against it's prior returns. If you're interested in investigating Mannatech's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Mannatech Tell Us?

The trend of ROCE at Mannatech is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 14% we see today. In addition to that, Mannatech is now employing 21% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 49%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Mannatech's ROCE

To see Mannatech reducing the capital employed in the business in tandem with diminishing returns, is concerning. Despite the concerning underlying trends, the stock has actually gained 0.8% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Mannatech does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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