There Are Reasons To Feel Uneasy About SyntheticMR's (NGM:SYNT) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think SyntheticMR (NGM:SYNT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 SyntheticMR:

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

0.069 = kr7.5m ÷ (kr127m - kr19m) (Based on the trailing twelve months to September 2022).

Thus, SyntheticMR has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 13%.

Our analysis indicates that SYNT is potentially undervalued!

Above you can see how the current ROCE for SyntheticMR compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For SyntheticMR Tell Us?

When we looked at the ROCE trend at SyntheticMR, we didn't gain much confidence. To be more specific, ROCE has fallen from 36% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On SyntheticMR's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that SyntheticMR is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 9.1% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for SyntheticMR (of which 1 is significant!) that you should know about.

While SyntheticMR isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.