What trends should we look for to identify stocks that can multiply in value over the long term? First of all, we would like to determine a growing return on capital employed (ROCE) and, at the same time, a constantly growing base of the capital employed. Simply put, these types of companies are compounding machines, which means they are continually reinvesting their profits with ever higher returns. In this sense, the ROCE is from Herbalife diet (NYSE: HLF) looks attractive right now. So let’s see what the yield trend can tell us.
Understanding Return on Investment (ROCE)
If you’ve never worked with ROCE, it measures the “return on investment” (pre-tax profit) a company generates from the capital invested in its business. To calculate this metric for Herbalife Nutrition, the formula is:
Return on investment = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.48 = $ 768 million ($ 2.7 billion – $ 1.1 billion) (based on the last twelve months through March 2021).
Therefore, Herbalife Nutrition has a ROCE of 48%. In absolute terms, that’s a great return, and even better than the Personal Products industry average of 16%.
Check out our latest analysis for Herbalife Nutrition
NYSE: HLF Return on Capital Employed May 18, 2021
Above you can see how the current ROCE for Herbalife Nutrition compares to its previous ROI, but there is only so much you can tell from the past. If you want to see which analysts are forecasting for the future, you should take a look at ours free Report for Herbalife Nutrition.
The ROCE trend
We’d be pretty happy with ROI like Herbalife Nutrition. The company has employed 36% more capital over the past five years and returns on capital have remained stable at 48%. With returns this high, it’s great that the company can continually reinvest its money at such attractive returns. You will see this when you look at well-run companies or cheap business models.
One more thing to note: Although the ROCE has remained relatively constant over the past five years, the reduction in short-term liabilities to 40% of total assets is easy to see from a business owner’s point of view. In fact, suppliers are now funding less of the business, which can lower some elements of risk. However, we would like this trend to continue, because as things stand today that is still a fairly high level.
What we can learn from Herbalife Nutrition’s ROCE
Herbalife Nutrition has proven its expertise by generating high returns as the capital invested, which we are very pleased about. And the stock has returned a significant 62% to shareholders over the past five years. While the stock may be “more expensive” than before, we believe the strong fundamentals warrant this stock for further investigation.
We’ve found that Herbalife Nutrition has some risks 2 warning signs (and 1 which may be serious) We think you should know about this.
If you’re looking for more stocks that have made high returns, check this out free List of stocks with solid balance sheets that also generate high returns on equity.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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