Will Synclayer's (TYO:1724) Growth In ROCE Persist?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Synclayer (TYO:1724) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.099 = JP¥470m ÷ (JP¥8.1b - JP¥3.3b) (Based on the trailing twelve months to September 2020).

Therefore, Synclayer has an ROCE of 9.9%. Ultimately, that's a low return and it under-performs the IT industry average of 15%.

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 want to delve into the historical earnings, revenue and cash flow of Synclayer, check out these free graphs here.

What Does the ROCE Trend For Synclayer Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 34%. 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 41%, which we'd consider pretty high. 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

In summary, it's great to see that Synclayer can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 223% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Synclayer can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Synclayer, we've discovered 4 warning signs that you should be aware of.

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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