Synthetica AD (BUL:SYN) May Have Issues Allocating Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Synthetica AD (BUL:SYN) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Synthetica AD:

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

0.043 = лв2.4m ÷ (лв77m - лв22m) (Based on the trailing twelve months to December 2020).

Therefore, Synthetica AD has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Transportation industry average of 6.5%.

Check out our latest analysis for Synthetica AD

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

How Are Returns Trending?

In terms of Synthetica AD's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 4.3% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 53% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On Synthetica AD's ROCE

To see Synthetica AD reducing the capital employed in the business in tandem with diminishing returns, is concerning. Despite the concerning underlying trends, the stock has actually gained 14% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Synthetica AD (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

While Synthetica AD 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. 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.
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