Should You Be Impressed By SYNergy ScienTech's (TPE:6558) Returns on Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at SYNergy ScienTech (TPE:6558), it didn't seem to tick all of these boxes.

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. To calculate this metric for SYNergy ScienTech, this is the formula:

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

0.051 = NT$95m ÷ (NT$2.5b - NT$602m) (Based on the trailing twelve months to September 2020).

Therefore, SYNergy ScienTech has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.1%.

Check out our latest analysis for SYNergy ScienTech

Historical performance is a great place to start when researching a stock so above you can see the gauge for SYNergy ScienTech's ROCE against it's prior returns. If you'd like to look at how SYNergy ScienTech has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is SYNergy ScienTech's ROCE Trending?

There are better returns on capital out there than what we're seeing at SYNergy ScienTech. Over the past five years, ROCE has remained relatively flat at around 5.1% and the business has deployed 108% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In conclusion, SYNergy ScienTech has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 345% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 2 warning signs facing SYNergy ScienTech that you might find interesting.

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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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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