Here's What We Make Of AS Tallinna Sadam's (TAL:TSM1T) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at AS Tallinna Sadam (TAL:TSM1T), we've spotted some signs that it could be struggling, so let's investigate.

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. The formula for this calculation on AS Tallinna Sadam is:

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

0.061 = €36m ÷ (€622m - €32m) (Based on the trailing twelve months to September 2020).

Thus, AS Tallinna Sadam has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

Check out our latest analysis for AS Tallinna Sadam

In the above chart we have measured AS Tallinna Sadam's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AS Tallinna Sadam.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at AS Tallinna Sadam. Unfortunately the returns on capital have diminished from the 7.9% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.

What We Can Learn From AS Tallinna Sadam's ROCE

In summary, it's unfortunate that AS Tallinna Sadam is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with AS Tallinna Sadam and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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