Capital returns at Natural Health Trends (NASDAQ:NHTC) do not inspire confidence
When researching a stock for investment purposes, what can tell us that the company is in decline? When we see a decline come back on capital employed (ROCE) in connection with a decrease base capital employed, this is often how a mature company shows signs of aging. This combination can tell you that the company is not only investing less, but earning less on what it invests. In light of this, at a first glance at Natural Health Trends (NASDAQ:NHTC), we’ve spotted signs that it might be in trouble, so let’s investigate.
What is return on capital employed (ROCE)?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used 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 = $798,000 ÷ ($88m – $23m) (Based on the last twelve months to June 2022).
So, Natural Health Trends has an ROI of 1.2%. Ultimately, it’s a poor performer and it underperforms the personal products industry average by 20%.
See our latest analysis for natural health trends
Historical performance is a great starting point when researching a stock. So above you can see Natural Health Trends’ ROCE gauge compared to its past returns. If you want to see Natural Health Trends past performance in other metrics, you can check out this free chart of past profits, revenue and cash flow.
So, what is the ROCE trend from Natural Health Trends?
In terms of the historical trend of ROCE from Natural Health Trends, that’s not fantastic. Unfortunately, yields have dropped significantly over the past five years to the 1.2% we see today. On top of that, the company uses 36% less capital in its operations. When you see both ROCE and capital employed declining, it can often be a sign of a mature, declining business that could be in structural decline. If these underlying trends continue, we wouldn’t be too optimistic about the future.
The Key Takeaway
In summary, it is unfortunate that Natural Health Trends is reducing its capital and also generating lower returns. It’s no surprise, then, that the stock has fallen 50% in the past five years, so it looks like investors are acknowledging these changes. With underlying trends that are not good in these areas, we would consider looking elsewhere.
Finally we found 5 warning signs of natural health trends (2 make us uncomfortable) that you should be aware of.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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