AS Tallinna Sadam (TAL:TSM1T) Will Be Looking To Turn Around Its Returns

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into AS Tallinna Sadam (TAL:TSM1T), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

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 AS Tallinna Sadam is:

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

0.055 = €33m ÷ (€628m - €30m) (Based on the trailing twelve months to December 2020).

So, AS Tallinna Sadam has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 7.1%.

View our latest analysis for AS Tallinna Sadam

Above you can see how the current ROCE for AS Tallinna Sadam compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering AS Tallinna Sadam here for free.

What Can We Tell From AS Tallinna Sadam's ROCE Trend?

There is reason to be cautious about AS Tallinna Sadam, given the returns are trending downwards. To be more specific, the ROCE was 7.4% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on AS Tallinna Sadam becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 17% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing AS Tallinna Sadam, we've discovered 2 warning signs that you should be aware of.

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