Synchro Food (TSE:3963) Might Become A Compounding Machine

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Synchro Food's (TSE:3963) ROCE trend, we were very happy with what we saw.

We've discovered 1 warning sign about Synchro Food. View them for free.

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 Synchro Food:

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

0.21 = JP¥1.1b ÷ (JP¥6.0b - JP¥709m) (Based on the trailing twelve months to December 2024).

Therefore, Synchro Food has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 14%.

See our latest analysis for Synchro Food

Historical performance is a great place to start when researching a stock so above you can see the gauge for Synchro Food's ROCE against it's prior returns. If you'd like to look at how Synchro Food has performed in the past in other metrics, you can view this free graph of Synchro Food's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Synchro Food's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 98% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And long term investors would be thrilled with the 121% 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.

If you'd like to know about the risks facing Synchro Food, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.