Today we'll evaluate USANA Health Sciences, Inc. (NYSE:USNA) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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'.
So, How Do We Calculate ROCE?
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:
0.40 = US$160m (US$532m - US$129m) (Based on the trailing twelve months to June 2019.)
Therefore, USANA Health Sciences has an ROCE of 40%.
Does USANA Health Sciences Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, USANA Health Sciences's ROCE is meaningfully higher than the 17% 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. Putting aside its position relative to its industry for now, in absolute terms, USANA Health Sciences's ROCE is currently very good.
You can see in the image below how USANA Health Sciences's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for USANA Health Sciences.
Do USANA Health Sciences's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. 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$532m and current liabilities of US$129m. Therefore its current liabilities are equivalent to approximately 24% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
The Bottom Line On USANA Health Sciences's ROCE
This is good to see, and with such a high ROCE, USANA Health Sciences may be worth a closer look. There might be better investments than USANA Health Sciences out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.