Synex Renewable Energy's (TSE:SXI) Returns On Capital Not Reflecting Well On The Business

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Synex Renewable Energy (TSE:SXI), we've spotted some signs that it could be struggling, so let's investigate.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Synex Renewable Energy is:

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

0.015 = CA$322k ÷ (CA$23m - CA$1.8m) (Based on the trailing twelve months to September 2021).

Therefore, Synex Renewable Energy has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 4.5%.

View our latest analysis for Synex Renewable Energy

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

How Are Returns Trending?

There is reason to be cautious about Synex Renewable Energy, given the returns are trending downwards. About five years ago, returns on capital were 2.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Synex Renewable Energy becoming one if things continue as they have.

On a side note, Synex Renewable Energy has done well to pay down its current liabilities to 7.9% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Synex Renewable Energy's ROCE

In summary, it's unfortunate that Synex Renewable Energy is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 26% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Synex Renewable Energy does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Synex Renewable Energy 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.