There Are Reasons To Feel Uneasy About TeamLease Services' (NSE:TEAMLEASE) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at TeamLease Services (NSE:TEAMLEASE), it didn't seem to tick all of these boxes.

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 TeamLease Services is:

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

0.074 = ₹760m ÷ (₹22b - ₹12b) (Based on the trailing twelve months to December 2024).

Therefore, TeamLease Services has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 12%.

View our latest analysis for TeamLease Services

Above you can see how the current ROCE for TeamLease Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering TeamLease Services for free.

What Does the ROCE Trend For TeamLease Services Tell Us?

When we looked at the ROCE trend at TeamLease Services, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, TeamLease Services has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On TeamLease Services' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for TeamLease Services. These growth trends haven't led to growth returns though, since the stock has fallen 17% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

TeamLease Services could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for TEAMLEASE on our platform quite valuable.

While TeamLease Services 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.