Stock Analysis

There Are Reasons To Feel Uneasy About Natural Alternatives International's (NASDAQ:NAII) Returns On Capital

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NasdaqGM:NAII
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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?

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

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

0.071 = US$6.6m ÷ (US$126m - US$33m) (Based on the trailing twelve months to December 2020).

Thus, Natural Alternatives International has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.

See our latest analysis for Natural Alternatives International

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NasdaqGM:NAII Return on Capital Employed March 29th 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'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.

How Are Returns Trending?

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 7.1% from 18% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take 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. These trends are starting to be recognized by investors since the stock has delivered a 16% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing Natural Alternatives International we've found 5 warning signs (1 is significant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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