If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Spin Master (TSE:TOY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Spin Master:

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

0.16 = US$239m ÷ (US$2.0b - US$496m) (Based on the trailing twelve months to September 2023).

So, Spin Master has an ROCE of 16%.  That's a relatively normal return on capital, and it's around the 17% generated by the Leisure industry.

View our latest analysis for Spin Master  TSX:TOY Return on Capital Employed January 4th 2024

In the above chart we have measured Spin Master's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Spin Master.

So How Is Spin Master's ROCE Trending?

On the surface, the trend of ROCE at Spin Master doesn't inspire confidence. To be more specific, ROCE has fallen from 36% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Spin Master has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.



Our Take On Spin Master's ROCE

In summary, we're somewhat concerned by Spin Master's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found  2 warning signs for Spin Master that we think you should be aware of.

While Spin Master isn't earning the highest return, check out this freelist 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.