Today we’ll look at Nature’s Sunshine Products, Inc. (NASDAQ:NATR) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
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.)
Therefore, Nature’s Sunshine Products has an ROCE of 7.8%.
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Is Nature’s Sunshine Products’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Nature’s Sunshine Products’s ROCE appears to be significantly below the 19% average in the Personal Products industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, 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. Investors may wish to consider higher-performing investments.
Nature’s Sunshine Products’s current ROCE of 7.8% is lower than 3 years ago, when the company reported a 11% ROCE. Therefore we wonder if the company is facing new headwinds.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. If Nature’s Sunshine Products is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Nature’s Sunshine Products’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Nature’s Sunshine Products has total liabilities of US$62m and total assets of US$209m. As a result, its current liabilities are equal to approximately 30% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
What We Can Learn From Nature’s Sunshine Products’s ROCE
That said, Nature’s Sunshine Products’s ROCE is mediocre, there may be more attractive investments around. 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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.