TAT Technologies (NASDAQ:TATT) Could Be Struggling To Allocate Capital

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at TAT Technologies (NASDAQ:TATT), so let's see why.

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. Analysts use this formula to calculate it for TAT Technologies:

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%. In absolute terms, that's a low return and it also 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.

So How Is TAT Technologies' ROCE Trending?

We are a bit worried about the trend of returns on capital at TAT Technologies. Unfortunately the returns on capital have diminished from the 3.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. 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

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here