Investors Met With Slowing Returns on Capital At Sinfonia TechnologyLtd (TSE:6507)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So, when we ran our eye over Sinfonia TechnologyLtd's (TSE:6507) trend of ROCE, we liked what we saw.

Understanding 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. Analysts use this formula to calculate it for Sinfonia TechnologyLtd:

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

0.12 = JP¥10b ÷ (JP¥127b - JP¥39b) (Based on the trailing twelve months to December 2023).

So, Sinfonia TechnologyLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Electrical industry.

Check out our latest analysis for Sinfonia TechnologyLtd

Above you can see how the current ROCE for Sinfonia TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sinfonia TechnologyLtd .

What Can We Tell From Sinfonia TechnologyLtd's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 50% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Sinfonia TechnologyLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Sinfonia TechnologyLtd has done well to reduce current liabilities to 31% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

The main thing to remember is that Sinfonia TechnologyLtd has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 160% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with Sinfonia TechnologyLtd and understanding it should be part of your investment process.

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. 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.