The Returns On Capital At Atrato Onsite Energy (LON:ROOF) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Atrato Onsite Energy (LON:ROOF), the trends above didn't look too great.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Atrato Onsite Energy:

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

0.015 = UK£2.1m ÷ (UK£145m - UK£9.9m) (Based on the trailing twelve months to March 2024).

Therefore, Atrato Onsite Energy has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 10%.

Check out our latest analysis for Atrato Onsite Energy

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Atrato Onsite Energy.

The Trend Of ROCE

There is reason to be cautious about Atrato Onsite Energy, given the returns are trending downwards. About one year ago, returns on capital were 2.0%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Atrato Onsite Energy becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 15% return over the last year, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Atrato Onsite Energy does have some risks though, and we've spotted 2 warning signs for Atrato Onsite Energy that you might be interested in.

While Atrato Onsite Energy 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.