Natural Health Trends (NASDAQ:NHTC) will look to reverse its returns

When it comes to investing, there are helpful financial metrics that can alert us when a business is potentially in trouble. More often than not we will see a decline come back on capital employed (ROCE) and a decrease amount capital employed. Such trends ultimately mean that the company reduces its investments and also earns less on what it has invested. So, after considering Natural Health Trends (NASDAQ:NHTC), the trends above didn’t look too good.

Understanding return on capital employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on Natural Health Trends is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.0027 = $174,000 ÷ ($85m – $20m) (Based on the last twelve months to September 2022).

Thereby, Natural Health Trends has a ROCE of 0.3%. In absolute terms, that’s a weak return, and it’s also below the personal products industry average of 17%.

Check out our latest natural health trend analysis

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 dive into the history of Natural Health Trends earnings, revenue, and cash flow, check out these free graphics here.

What does the ROCE trend tell us about natural health trends?

The yield trend generated by Natural Health Trends raises some concerns. Unfortunately, yields have declined significantly over the past five years to the 0.3% we see today. Equally concerning is that the amount of capital deployed in the business has decreased by 39% over the same period. When you see both ROCE and capital employed declining, it can often be a sign of a mature, declining business that may be in structural decline. Typically, companies with these characteristics are not ones that tend to multiply over the long term, because statistically speaking, they have already gone through the growth phase of their life cycle.

The essentials on the ROCE of trends in natural health

In summary, it is unfortunate that Natural Health Trends reduces its capital base and also generates lower returns. Long-term shareholders who have held the shares for the past five years have experienced a 61% depreciation of their investment, so it looks like the market might not like these trends either. That being the case, unless the underlying trends return to a more positive trajectory, we would consider looking elsewhere.

Finally we found 5 warning signs of natural health trends (2 should not be ignored) which you should be aware of.

If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive 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.