Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into USANA Health Sciences (NYSE:USNA), we weren’t too upbeat about how things were going.
What Is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on USANA Health Sciences is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = US$96m ÷ (US$603m – US$114m) (Based on the trailing twelve months to July 2023).
Thus, USANA Health Sciences has an ROCE of 20%. In absolute terms that’s a great return and it’s even better than the Personal Products industry average of 13%.
View our latest analysis for USANA Health Sciences
Above you can see how the current ROCE for USANA Health Sciences compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For USANA Health Sciences Tell Us?
In terms of USANA Health Sciences’ historical ROCE movements, the trend doesn’t inspire confidence. To be more specific, the ROCE was 37% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren’t as high due potentially to new competition or smaller margins. If these trends continue, we wouldn’t expect USANA Health Sciences to turn into a multi-bagger.
The Bottom Line
In summary, it’s unfortunate that USANA Health Sciences is generating lower returns from the same amount of capital. Investors haven’t taken kindly to these developments, since the stock has declined 47% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we’d consider looking elsewhere.
If you’d like to know about the risks facing USANA Health Sciences, we’ve discovered 1 warning sign that you should be aware of.
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.
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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.
