SYZYGY (ETR:SYZ) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on SYZYGY is:

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

0.026 = €2.3m ÷ (€112m - €24m) (Based on the trailing twelve months to September 2020).

Thus, SYZYGY has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Media industry average of 8.6%.

View our latest analysis for SYZYGY

Above you can see how the current ROCE for SYZYGY compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SYZYGY.

The Trend Of ROCE

In terms of SYZYGY's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 2.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, SYZYGY has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, we're somewhat concerned by SYZYGY's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 25% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 3 warning signs facing SYZYGY that you might find interesting.

While SYZYGY 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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