ATI Physical Therapy (NYSE:ATIP) Has Some Difficulty Using Its Capital Effectively

When researching a stock for investment, what can tell us that the company is 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at ATI Physical Therapy (NYSE:ATIP), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ATI Physical Therapy is:

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

0.0018 = US$1.4m ÷ (US$967m - US$144m) (Based on the trailing twelve months to September 2024).

So, ATI Physical Therapy has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10.0%.

Check out our latest analysis for ATI Physical Therapy

Above you can see how the current ROCE for ATI Physical Therapy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for ATI Physical Therapy .

What Can We Tell From ATI Physical Therapy's ROCE Trend?

The trend of ROCE at ATI Physical Therapy is showing some signs of weakness. To be more specific, today's ROCE was 1.4% four years ago but has since fallen to 0.2%. On top of that, the business is utilizing 66% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Key Takeaway

To see ATI Physical Therapy reducing the capital employed in the business in tandem with diminishing returns, is concerning. We expect this has contributed to the stock plummeting 99% during the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for ATI Physical Therapy (of which 1 doesn't sit too well with us!) that you should know about.

While ATI Physical Therapy 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.