There Are Reasons To Feel Uneasy About National Vision Holdings' (NASDAQ:EYE) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at National Vision Holdings (NASDAQ:EYE), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.024 = US$48m ÷ (US$2.3b - US$363m) (Based on the trailing twelve months to July 2023).

So, National Vision Holdings has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

View 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 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. Around five years ago the returns on capital were 5.4%, but since then they've fallen to 2.4%. 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.

The Bottom Line

To conclude, we've found that National Vision Holdings is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with National Vision Holdings and understanding it should be part of your investment process.

While National Vision Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.