Yahoo Finance USANA Health Sciences, Inc. (NYSE:USNA) Is Employing Capital Very Effectively
Today we'll look at USANA Health Sciences, Inc. (NYSE:USNA) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for USANA Health Sciences:
0.43 = US$150m ÷ (US$474m - US$125m) (Based on the trailing twelve months to March 2020.)
Therefore, USANA Health Sciences has an ROCE of 43%.
Check out our latest analysis for USANA Health Sciences
Is USANA Health Sciences's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, USANA Health Sciences's ROCE is meaningfully higher than the 21% average in the Personal Products industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, USANA Health Sciences's ROCE in absolute terms currently looks quite high.
The image below shows how USANA Health Sciences's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for USANA Health Sciences.
How USANA Health Sciences's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
USANA Health Sciences has total assets of US$474m and current liabilities of US$125m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
What We Can Learn From USANA Health Sciences's ROCE
With low current liabilities and a high ROCE, USANA Health Sciences could be worthy of further investigation. USANA Health Sciences looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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This article by Simply Wall St is general in nature. 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. Thank you for reading.
