Returns On Capital At TAT Technologies (NASDAQ:TATT) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, TAT Technologies (NASDAQ:TATT) we aren't filled with optimism, but let's investigate further.

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 TAT Technologies is:

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

0.014 = US$1.4m ÷ (US$125m - US$28m) (Based on the trailing twelve months to March 2023).

Therefore, TAT Technologies has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.9%.

Check out our latest analysis for TAT Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for TAT Technologies' ROCE against it's prior returns. If you'd like to look at how TAT Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

SWOT Analysis for TAT Technologies

What Can We Tell From TAT Technologies' ROCE Trend?

In terms of TAT Technologies' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.0%, 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 five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on TAT Technologies becoming one if things continue as they have.

What We Can Learn From TAT Technologies' ROCE

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. Long term shareholders who've owned the stock over the last five years have experienced a 13% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 2 warning signs for TAT Technologies you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.