Is the stock price of Nu Skin Enterprises, Inc. (NYSE:NUS) struggling due to its mixed financials?
It’s hard to get excited after looking at the recent performance of Nu Skin Enterprises (NYSE:NUS), as its stock is down 13% in the past three months. However, we decided to study the company’s financial statements to determine if they had anything to do with the price drop. Fundamentals usually dictate market outcomes, so it makes sense to study company finances. Specifically, we decided to study the ROE of Nu Skin Enterprises in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Nu Skin Enterprises
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Nu Skin Enterprises is:
12% = $113 million ÷ $941 million (based on trailing 12 months to June 2022).
“Yield” is the income the business has earned over the past year. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.12.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Nu Skin Enterprises earnings growth and 12% ROE
At first glance, Nu Skin Enterprises seems to have a decent ROE. Regardless, the company’s ROE is still well below the industry average of 17%. Upon further research, we found that Nu Skin Enterprises’ net income growth of 4.9% over the past five years is quite low. Keep in mind that the company has a respectable level of ROE. It’s just that the industry’s ROE is higher. So there could be other factors keeping earnings growth low. These include poor revenue retention or poor capital allocation.
Next, we benchmarked Nu Skin Enterprises’ net income growth against the industry and were disappointed to see that the company’s growth was below the industry average growth of 21% over the same period.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you may want to check whether Nu Skin Enterprises is trading on a high P/E or on a low P/E, relative to its industry.
Does Nu Skin Enterprises effectively reinvest its profits?
With a high three-year median payout ratio of 52% (or a retention rate of 48%), most of Nu Skin Enterprises’ earnings are paid out to shareholders. This certainly contributes to the weak earnings growth the company has seen.
Additionally, Nu Skin Enterprises has been paying dividends for at least a decade or more, suggesting that management must have perceived that shareholders preferred dividends to earnings growth. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 35% over the next three years. Thus, the expected decline in the payout rate explains the expected increase in the company’s ROE to 21%, over the same period.
Overall, we believe that the performance displayed by Nu Skin Enterprises is open to many interpretations. Specifically, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return. Investors might have benefited had the company reinvested more of its earnings. As mentioned earlier, the company retains a small portion of its profits. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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