Natural Health Trends (NASDAQ:NHTC) Will Be Looking To Turn Around Its Returns

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Natural Health Trends (NASDAQ:NHTC), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Natural Health Trends is:

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

0.0027 = US$174k ÷ (US$85m - US$20m) (Based on the trailing twelve months to September 2022).

Thus, Natural Health Trends has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 17%.

View our latest analysis for Natural Health Trends

Historical performance is a great place to start when researching a stock so above you can see the gauge for Natural Health Trends' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Natural Health Trends, check out these free graphs here.

What Does the ROCE Trend For Natural Health Trends Tell Us?

The trend of returns that Natural Health Trends is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 0.3% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 39% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On Natural Health Trends' ROCE

In summary, it's unfortunate that Natural Health Trends is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 61% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 5 warning signs for Natural Health Trends (2 shouldn't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.