What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Ergo, when we looked at the ROCE trends at Nu Skin Enterprises (NYSE:NUS), we liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.21 = US$292m ÷ (US$1.9b - US$530m) (Based on the trailing twelve months to December 2021).
Therefore, Nu Skin Enterprises has an ROCE of 21%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar 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.
How Are Returns Trending?
It's hard not to be impressed by Nu Skin Enterprises' returns on capital. The company has employed 28% more capital in the last five years, and the returns on that capital have remained stable at 21%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
The Bottom Line On Nu Skin Enterprises' ROCE
Nu Skin Enterprises has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. In light of this, the stock has only gained 8.8% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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.