This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Nature’s Sunshine Products Inc (NASDAQ:NATR)’s return fundamentals and stock market performance.
If you purchase a NATR share you are effectively becoming a partner with many other shareholders. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently Nature’s Sunshine Products is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Nature’s Sunshine Products’s Return On Capital Employed
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Nature’s Sunshine Products’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for NATR
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$2.70m ÷ (US$194.46m – US$57.84m) = 1.98%
As you can see, NATR earned $2 from every $100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Nature’s Sunshine Products is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.
Why is this the case?
Nature’s Sunshine Products’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Nature’s Sunshine Products is in an adverse position, but this can change if these factors improve. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Three years ago, NATR’s ROCE was 11.53%, which means the company’s capital returns have worsened. Over the same period, EBT went from US$16.73m to US$2.70m and capital employed declined as well albeit by a relatively smaller amount, signifying ROCE decreased as a result of a greater fall in earnings compared to the business’ use of capital.
NATR’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate NATR or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for NATR’s future growth? Take a look at our free research report of analyst consensus for NATR’s outlook.
- Valuation: What is NATR worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether NATR is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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 email@example.com.