Stock Analysis

Capital Allocation Trends At Natural Alternatives International (NASDAQ:NAII) Aren't Ideal

  •  Updated
NasdaqGM:NAII
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Natural Alternatives International (NASDAQ:NAII), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Natural Alternatives International, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = US$14m ÷ (US$118m - US$23m) (Based on the trailing twelve months to March 2021).

Therefore, Natural Alternatives International has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.

See our latest analysis for Natural Alternatives International

roce
NasdaqGM:NAII Return on Capital Employed August 5th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Natural Alternatives International's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Natural Alternatives International Tell Us?

In terms of Natural Alternatives International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 21% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Natural Alternatives International's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Natural Alternatives International. And the stock has followed suit returning a meaningful 83% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 2 warning signs we've spotted with Natural Alternatives International (including 1 which makes us a bit uncomfortable) .

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