There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Nu Skin Enterprises (NYSE:NUS), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Nu Skin Enterprises is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$159m ÷ (US$1.8b - US$359m) (Based on the trailing twelve months to December 2022).
So, Nu Skin Enterprises has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Personal Products industry.
In the above chart we have measured Nu Skin Enterprises' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
SWOT Analysis for Nu Skin Enterprises
- Debt is not viewed as a risk.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Personal Products market.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio and estimated fair value.
- Dividends are not covered by cash flow.
- Annual earnings are forecast to grow slower than the American market.
What Can We Tell From Nu Skin Enterprises' ROCE Trend?
On the surface, the trend of ROCE at Nu Skin Enterprises doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 24% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
We're a bit apprehensive about Nu Skin Enterprises because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 36% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing, we've spotted 3 warning signs facing Nu Skin Enterprises that you might find interesting.
While Nu Skin Enterprises may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
What are the risks and opportunities for Nu Skin Enterprises?
Trading at 26% below our estimate of its fair value
Earnings are forecast to grow 26.79% per year
Significant insider selling over the past 3 months
Large one-off items impacting financial results
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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.