Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount 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. Having said that, after a brief look, USANA Health Sciences (NYSE:USNA) we aren't filled with optimism, but let's investigate further.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for USANA Health Sciences:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = US$117m ÷ (US$556m - US$126m) (Based on the trailing twelve months to October 2022).
So, USANA Health Sciences has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 14%.
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'd like, you can check out the forecasts from the analysts covering USANA Health Sciences here for free.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about USANA Health Sciences, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 35% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 USANA Health Sciences becoming one if things continue as they have.
In summary, it's unfortunate that USANA Health Sciences is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 22% over the last five years, so it looks like investors are recognizing these changes. 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 more about USANA Health Sciences, we've spotted 2 warning signs, and 1 of them is concerning.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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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