Investors Met With Slowing Returns on Capital At TeamViewer (ETR:TMV)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at TeamViewer (ETR:TMV), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. To calculate this metric for TeamViewer, this is the formula:

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

0.36 = €171m ÷ (€1.1b - €582m) (Based on the trailing twelve months to June 2024).

Thus, TeamViewer has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Software industry average of 14%.

Check out our latest analysis for TeamViewer

In the above chart we have measured TeamViewer's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TeamViewer for free.

What Can We Tell From TeamViewer's ROCE Trend?

There hasn't been much to report for TeamViewer's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So it may not be a multi-bagger in the making, but given the decent 36% return on capital, it'd be difficult to find fault with the business's current operations.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 55% of total assets, this reported ROCE would probably be less than36% because total capital employed would be higher.The 36% ROCE could be even lower if current liabilities weren't 55% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

In Conclusion...

In summary, TeamViewer isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Since the stock has declined 48% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think TeamViewer has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for TeamViewer that we think you should be aware of.

TeamViewer is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.