When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Natural Health Trends (NASDAQ:NHTC), we've spotted some signs that it could be struggling, so let's investigate.
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. Analysts use this formula to calculate it for Natural Health Trends:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = US$798k ÷ (US$88m - US$23m) (Based on the trailing twelve months to June 2022).
So, Natural Health Trends has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 20%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Natural Health Trends' ROCE against it's prior returns. If you'd like to look at how Natural Health Trends has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Natural Health Trends' ROCE Trending?
In terms of Natural Health Trends' historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 1.2% we see today. On top of that, the business is utilizing 36% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Key Takeaway
In summary, it's unfortunate that Natural Health Trends is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 50% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we found 5 warning signs for Natural Health Trends (2 make us uncomfortable) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
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