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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Natural Alternatives International (NASDAQ:NAII) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Natural Alternatives International is:

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

0.091 = US$11m ÷ (US$141m - US$19m) (Based on the trailing twelve months to December 2022).

Therefore, Natural Alternatives International has an ROCE of 9.1%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 13%.

View our latest analysis for Natural Alternatives International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Natural Alternatives International's ROCE against it's prior returns. If you'd like to look at how Natural Alternatives International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Natural Alternatives International, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.1%. However it looks like Natural Alternatives International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Natural Alternatives International's ROCE

In summary, Natural Alternatives International is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 24% in the last five years. Therefore based on the analysis done in this article, we don't think Natural Alternatives International has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for Natural Alternatives International you'll probably want to know about.

While Natural Alternatives International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.