National Vision Holdings' (NASDAQ:EYE) Returns Have Hit A Wall

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at National Vision Holdings (NASDAQ:EYE) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.062 = US$120m ÷ (US$2.3b - US$354m) (Based on the trailing twelve months to July 2022).

Thus, National Vision Holdings has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 17%.

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 here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at National Vision Holdings. Over the past five years, ROCE has remained relatively flat at around 6.2% and the business has deployed 41% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From National Vision Holdings' ROCE

Long story short, while National Vision Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 37% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

National Vision Holdings does have some risks though, and we've spotted 1 warning sign for National Vision Holdings that you might be interested in.

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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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.