If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Herbalife Nutrition (NYSE:HLF), we aren't jumping out of our chairs because returns are decreasing.
What is 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. Analysts use this formula to calculate it for Herbalife Nutrition:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.34 = US$620m ÷ (US$2.9b - US$1.1b) (Based on the trailing twelve months to September 2020).
Thus, Herbalife Nutrition has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 15%.
Above you can see how the current ROCE for Herbalife Nutrition compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Herbalife Nutrition here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Herbalife Nutrition doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 43% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Herbalife Nutrition's ROCE
While returns have fallen for Herbalife Nutrition in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 108% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing: We've identified 3 warning signs with Herbalife Nutrition (at least 1 which can't be ignored) , and understanding these would certainly be useful.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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