What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think SYZYGY (ETR:SYZ) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 SYZYGY:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = €3.9m ÷ (€118m - €30m) (Based on the trailing twelve months to March 2021).
So, SYZYGY has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Media industry average of 14%.
Check out our latest analysis for SYZYGY
In the above chart we have measured SYZYGY's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SYZYGY here for free.
What Can We Tell From SYZYGY's ROCE Trend?
On the surface, the trend of ROCE at SYZYGY doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.4% from 9.3% five years ago. 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.
In Conclusion...
From the above analysis, we find it rather worrisome that returns on capital and sales for SYZYGY have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 20% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a separate note, we've found 1 warning sign for SYZYGY you'll probably want to know about.
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.
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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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About XTRA:SYZ
SYZYGY
Through its subsidiaries, provides digital media content services in Germany, the United Kingdom, and internationally.
Adequate balance sheet and fair value.
