What Should You Know About Natural Health Trends Corp’s (NASDAQ:NHTC) Return On Capital?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Natural Health Trends Corp (NASDAQ:NHTC) stock.

If you purchase a NHTC 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. Your return is tied to NHTC’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Natural Health Trends’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

View our latest analysis for Natural Health Trends

What is Return on Capital Employed (ROCE)?

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Natural Health Trends is good at growing investor capital. I have calculated Natural Health Trends’s ROCE for you below:

ROCE Calculation for NHTC

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US$40.49m ÷ (US$167.39m – US$41.78m) = 32.23%

The calculation above shows that NHTC’s earnings were 32.23% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by NHTC and means the company creates an excellent amount of earnings on capital employed. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound extremely well over time.

NasdaqCM:NHTC Last Perf August 1st 18
NasdaqCM:NHTC Last Perf August 1st 18

Does this mean I should invest?

NHTC is efficient with the use of capital, but this is only the case if NHTC continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Natural Health Trends will continue the solid returns. Looking at the past 3 year period shows us that NHTC weakened investor return on capital employed from 71.03%. We can see that earnings have actually increased from US$24.34m to US$40.49m but capital employed rose by a proportionally greater amount as a result of an increase in total assets , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.

Next Steps

Despite NHTC’s downward trend in ROCE in the recent past, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

  1. Future Outlook: What are well-informed industry analysts predicting for NHTC’s future growth? Take a look at our free research report of analyst consensus for NHTC’s outlook.
  2. Valuation: What is NHTC worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NHTC is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.