We Like These Underlying Return On Capital Trends At Sygnity (WSE:SGN)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Sygnity (WSE:SGN) so let's look a bit deeper.

What is 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. The formula for this calculation on Sygnity is:

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

0.19 = zł34m ÷ (zł296m - zł113m) (Based on the trailing twelve months to December 2020).

Therefore, Sygnity has an ROCE of 19%. 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 Sygnity

In the above chart we have measured Sygnity's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sygnity here for free.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Sygnity. We found that the returns on capital employed over the last five years have risen by 996%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 33% less capital than it was five years ago. Sygnity may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

What We Can Learn From Sygnity's ROCE

In summary, it's great to see that Sygnity has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 26% to shareholders. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing Sygnity we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Sygnity 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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