Returns On Capital Signal Tricky Times Ahead For Syrma SGS Technology (NSE:SYRMA)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Syrma SGS Technology (NSE:SYRMA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Our free stock report includes 2 warning signs investors should be aware of before investing in Syrma SGS Technology. Read for free now.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Syrma SGS Technology is:

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

0.095 = ₹1.8b ÷ (₹40b - ₹21b) (Based on the trailing twelve months to December 2024).

Therefore, Syrma SGS Technology has an ROCE of 9.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 14%.

Check out our latest analysis for Syrma SGS Technology

In the above chart we have measured Syrma SGS Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Syrma SGS Technology .

What Can We Tell From Syrma SGS Technology's ROCE Trend?

On the surface, the trend of ROCE at Syrma SGS Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 22% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Syrma SGS Technology has a high ratio of current liabilities to total assets of 52%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Syrma SGS Technology. These trends are starting to be recognized by investors since the stock has delivered a 4.7% gain to shareholders who've held over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing to note, we've identified 2 warning signs with Syrma SGS Technology and understanding these should be part of your investment process.

While Syrma SGS Technology 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.