There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Synectics (LON:SNX) so let's look a bit deeper.
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 Synectics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = UK£2.6m ÷ (UK£63m - UK£21m) (Based on the trailing twelve months to November 2019).
Therefore, Synectics has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 8.5%.
In the above chart we have a measured Synectics' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Shareholders will be relieved that Synectics has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 6.1% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
The Bottom Line On Synectics' ROCE
To bring it all together, Synectics has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 30% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Synectics, you might be interested to know about the 2 warning signs that our analysis has discovered.
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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