If we wish to identify a long-term multiplying activity, we must first ask ourselves the following question: What should we be looking for in terms of underlying trends? Or, to put it another way, what are the fundamentals that make a company’s shares a valuable asset?
Finding a firm with growing returns on capital employed (ROCE) and an increasing quantity of capital employed is a popular strategy. This simply implies that a firm has lucrative projects that it can reinvest in, which is a characteristic of a profit-making machine. In other words, Herbalife spends more cash in your business and earns higher returns on that capital each time.
With this in mind, Herbalife Nutrition’s (NYSE: HLF) Return on Capital Employed appears to be appealing at the moment, so let’s see what the trend of these returns may tell us.
Return on Capital Employed (ROCE) is a term that refers to the amount of (ROCE)
For those unfamiliar, ROCE is a ratio of a company’s yearly pre-tax profit (performance) to the capital invested in the firm. In Herbalife Nutrition, the formula for this calculation is:
Earnings Before Interest and Taxes (EBIT) = Return on Capital Employed (Total Assets – Current Liabilities)
As a result, Herbalife Nutrition has a ROCE of 43%. It’s an outstanding result, and it outperforms the industry’s average of 17 percent.
So, what’s the deal with the Herbalife Nutrition ROCE trend?
In terms of Herbalife Nutrition’s ROCE history, this is rather outstanding. Over the previous five years, the company has continuously risen by 43 percent, and the capital utilized by the company has increased by 62 percent.
Returns like this are the envy of most businesses, and the fact that they’ve been reinvested at these rates again and over is even better.
Another thing to keep in mind is that, while ROCE has been pretty steady over the previous five years, it’s encouraging to see current liabilities decline to 37% of total assets from the perspective of a business owner. Indeed, suppliers are financing the Herbalife company less with loans these days, which may minimize some of the risk associated with buying this stock.
In conclusion, Herbalife Nutrition appears to have all of the components for a buy-and-hold investment, since the firm has been able to combine its invested capital at extremely profitable rates of return. It’s no surprise, therefore, that stockholders who have held the stock for the previous five years have seen a healthy 70 percent return. As a result, while the stock may be more “expensive” than it was previously, we feel that the stock’s solid fundamentals warrant its acquisition and future retention.
Heading 2: This important metric helps Herbalife stock perform well in the stock market.