Today we’ll evaluate Nature’s Sunshine Products, Inc. (NASDAQ:NATR) to determine whether it could have potential as an investment idea. 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. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In the end, ROCE is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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:
0.051 = US$2.9m ÷ (US$192m – US$61m) (Based on the trailing twelve months to September 2018.)
Therefore, Nature’s Sunshine Products has an ROCE of 5.1%.
Is Nature’s Sunshine Products’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Nature’s Sunshine Products’s ROCE is meaningfully below the Personal Products industry average of 23%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Nature’s Sunshine Products compares to its industry, its ROCE in absolute terms is low; not much better than the ~2.9% available in government bonds. There are potentially more appealing investments elsewhere.
Nature’s Sunshine Products’s current ROCE of 5.1% is lower than 3 years ago, when the company reported a 9.9% ROCE. This makes us wonder if the business is facing new challenges.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Nature’s Sunshine Products has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Nature’s Sunshine Products’s Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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$192m and current liabilities of US$61m. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Nature’s Sunshine Products has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
Our Take On Nature’s Sunshine Products’s ROCE
There are likely better investments out there. We prefer high ROCE ratios over lower ones, but a weaker business can also be rewarding if it has managers with skin in the game. Therefore, you will not want to miss this free chart depicting insider transactions
Of course Nature’s Sunshine Products may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.