We Like These Underlying Return On Capital Trends At Synclayer (TYO:1724)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Synclayer (TYO:1724) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Synclayer:

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

0.17 = JP¥765m ÷ (JP¥9.4b - JP¥4.8b) (Based on the trailing twelve months to December 2020).

So, Synclayer has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the IT industry.

View our latest analysis for Synclayer

Historical performance is a great place to start when researching a stock so above you can see the gauge for Synclayer's ROCE against it's prior returns. If you're interested in investigating Synclayer's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Synclayer Tell Us?

We like the trends that we're seeing from Synclayer. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 53%. So we're very much inspired by what we're seeing at Synclayer thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Synclayer has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Synclayer has. Since the stock has returned a staggering 234% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 4 warning signs facing Synclayer that you might find interesting.

While Synclayer may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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