Will Team Group's (TPE:4967) Growth In ROCE Persist?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Team Group (TPE:4967) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Team Group:

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

0.093 = NT$161m ÷ (NT$3.3b - NT$1.6b) (Based on the trailing twelve months to September 2020).

So, Team Group has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 11%.

View our latest analysis for Team Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Team Group's ROCE against it's prior returns. If you're interested in investigating Team Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Team Group Tell Us?

The fact that Team Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 9.3% which is a sight for sore eyes. Not only that, but the company is utilizing 254% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Team Group has decreased current liabilities to 48% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Team Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

In Conclusion...

Long story short, we're delighted to see that Team Group's reinvestment activities have paid off and the company is now profitable. And a remarkable 1,207% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Team Group we've found 4 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

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.

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