What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Nu Skin Enterprises (NYSE:NUS), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Nu Skin Enterprises:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$105m ÷ (US$1.6b - US$309m) (Based on the trailing twelve months to June 2024).
So, Nu Skin Enterprises has an ROCE of 8.2%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 16%.
Above you can see how the current ROCE for Nu Skin Enterprises 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 Nu Skin Enterprises for free.
What Does the ROCE Trend For Nu Skin Enterprises Tell Us?
In terms of Nu Skin Enterprises' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 23%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nu Skin Enterprises becoming one if things continue as they have.
The Key Takeaway
In summary, it's unfortunate that Nu Skin Enterprises is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 73% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing: We've identified 2 warning signs with Nu Skin Enterprises (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
While Nu Skin Enterprises isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.