Team17 Group (LON:TM17) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at Team17 Group (LON:TM17) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Team17 Group is:

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

0.13 = UK£34m ÷ (UK£297m - UK£32m) (Based on the trailing twelve months to June 2024).

So, Team17 Group has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Entertainment industry average it falls behind.

See our latest analysis for Team17 Group

In the above chart we have measured Team17 Group'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 Team17 Group for free.

How Are Returns Trending?

When we looked at the ROCE trend at Team17 Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 25% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Team17 Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. Therefore based on the analysis done in this article, we don't think Team17 Group has the makings of a multi-bagger.

Team17 Group does have some risks though, and we've spotted 1 warning sign for Team17 Group that you might be interested in.

While Team17 Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.