The Returns On Capital At Montana Aerospace (VTX:AERO) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Montana Aerospace (VTX:AERO) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Montana Aerospace:

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

0.0081 = €13m ÷ (€2.1b - €575m) (Based on the trailing twelve months to September 2023).

Therefore, Montana Aerospace has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 11%.

Check out our latest analysis for Montana Aerospace

In the above chart we have measured Montana Aerospace's 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 Montana Aerospace here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Montana Aerospace, we didn't gain much confidence. Around four years ago the returns on capital were 3.4%, but since then they've fallen to 0.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Montana Aerospace's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Montana Aerospace. In light of this, the stock has only gained 2.3% over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know about the risks facing Montana Aerospace, we've discovered 1 warning sign that you should be aware of.

While Montana Aerospace 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.