Investors Met With Slowing Returns on Capital At TeamSpirit (TSE:4397)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating TeamSpirit (TSE:4397), we don't think it's current trends fit the mold of a multi-bagger.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Understanding Return On Capital Employed (ROCE)

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

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

0.14 = JP¥214m ÷ (JP¥4.1b - JP¥2.6b) (Based on the trailing twelve months to May 2025).

Therefore, TeamSpirit has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 18% generated by the Software industry.

Check out our latest analysis for TeamSpirit

Historical performance is a great place to start when researching a stock so above you can see the gauge for TeamSpirit's ROCE against it's prior returns. If you'd like to look at how TeamSpirit has performed in the past in other metrics, you can view this free graph of TeamSpirit's past earnings, revenue and cash flow.

What Does the ROCE Trend For TeamSpirit Tell Us?

Things have been pretty stable at TeamSpirit, with its capital employed and returns on that capital staying somewhat the same for the last four years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if TeamSpirit doesn't end up being a multi-bagger in a few years time.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last four years. This is intriguing because if current liabilities hadn't increased to 64% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 64% 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.

The Bottom Line On TeamSpirit's ROCE

In summary, TeamSpirit isn't compounding its earnings but is generating stable returns on the same amount of capital employed. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 74% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching TeamSpirit, you might be interested to know about the 3 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.