Natural Alternatives International's (NASDAQ:NAII) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Natural Alternatives International (NASDAQ:NAII) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Natural Alternatives International:

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

0.09 = US$11m ÷ (US$150m - US$27m) (Based on the trailing twelve months to September 2022).

Thus, Natural Alternatives International has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 14%.

See 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're interested in investigating Natural Alternatives International's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Natural Alternatives International's ROCE Trending?

When we looked at the ROCE trend at Natural Alternatives International, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Natural Alternatives International's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Natural Alternatives International and understanding it should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.