SYNergy ScienTech (TPE:6558) May Have Issues Allocating Its Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at SYNergy ScienTech (TPE:6558) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for SYNergy ScienTech:

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

0.054 = NT$103m ÷ (NT$2.6b - NT$656m) (Based on the trailing twelve months to December 2020).

So, SYNergy ScienTech has an ROCE of 5.4%. Ultimately, that's a low return and it 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.

What Can We Tell From SYNergy ScienTech's ROCE Trend?

In terms of SYNergy ScienTech's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.3%, but since then they've fallen to 5.4%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From SYNergy ScienTech's ROCE

We're a bit apprehensive about SYNergy ScienTech because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 267% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing SYNergy ScienTech we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

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