National Vision Holdings (NASDAQ:EYE) Shareholders Will Want The ROCE Trajectory To Continue

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at National Vision Holdings (NASDAQ:EYE) so let's look a bit deeper.

Understanding 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. The formula for this calculation on National Vision Holdings is:

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

0.078 = US$154m ÷ (US$2.3b - US$345m) (Based on the trailing twelve months to April 2022).

Thus, National Vision Holdings has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 18%.

Check out 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.

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 47%. So we're very much inspired by what we're seeing at National Vision Holdings thanks to its ability to profitably reinvest capital.

What We Can Learn From National Vision Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what National Vision Holdings has. Astute investors may have an opportunity here because the stock has declined 17% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, National Vision Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

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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.