Are SyntheticMR AB (publ)’s (NGM:SYNT) High Returns Really That Great?

Today we are going to look at SyntheticMR AB (publ) (NGM:SYNT) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for SyntheticMR:

0.28 = kr14m ÷ (kr59m – kr11m) (Based on the trailing twelve months to September 2019.)

So, SyntheticMR has an ROCE of 28%.

See our latest analysis for SyntheticMR

Is SyntheticMR’s ROCE Good?

One way to assess ROCE is to compare similar companies. SyntheticMR’s ROCE appears to be substantially greater than the 16% average in the Healthcare Services industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, SyntheticMR’s ROCE in absolute terms currently looks quite high.

SyntheticMR delivered an ROCE of 28%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. The image below shows how SyntheticMR’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

NGM:SYNT Past Revenue and Net Income, January 22nd 2020
NGM:SYNT Past Revenue and Net Income, January 22nd 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for SyntheticMR.

How SyntheticMR’s Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

SyntheticMR has total assets of kr59m and current liabilities of kr11m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

Our Take On SyntheticMR’s ROCE

Low current liabilities and high ROCE is a good combination, making SyntheticMR look quite interesting. There might be better investments than SyntheticMR out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like SyntheticMR better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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