National Vision Holdings (NASDAQ:EYE) Could Be Struggling To Allocate Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into National Vision Holdings (NASDAQ:EYE), we weren't too upbeat about how things were going.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for National Vision Holdings:

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

0.022 = US$34m ÷ (US$2.0b - US$468m) (Based on the trailing twelve months to March 2025).

Thus, National Vision Holdings has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.

See our latest analysis for National Vision Holdings

In the above chart we have measured National Vision Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering National Vision Holdings for free.

How Are Returns Trending?

The trend of returns that National Vision Holdings is generating are raising some concerns. To be more specific, today's ROCE was 4.2% five years ago but has since fallen to 2.2%. In addition to that, National Vision Holdings is now employing 20% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, National Vision Holdings' current liabilities have increased over the last five years to 23% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On National Vision Holdings' ROCE

In summary, it's unfortunate that National Vision Holdings is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 17% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing National Vision Holdings that you might find interesting.

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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.