National Vision Holdings (NASDAQ:EYE) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at National Vision Holdings (NASDAQ:EYE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for National Vision Holdings, this is the formula:

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

0.02 = US$36m ÷ (US$2.2b - US$398m) (Based on the trailing twelve months to December 2023).

Therefore, National Vision Holdings has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 14%.

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're interested, you can view the analysts predictions in our free analyst report for National Vision Holdings .

What Can We Tell From National Vision Holdings' ROCE Trend?

When we looked at the ROCE trend at National Vision Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.2% 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'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 National Vision Holdings' ROCE

In summary, National Vision Holdings 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 25% in the last five years. Therefore based on the analysis done in this article, we don't think National Vision Holdings has the makings of a multi-bagger.

If you're still interested in National Vision Holdings it's worth checking out our FREE intrinsic value approximation for EYE to see if it's trading at an attractive price in other respects.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.