What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at SynPower (TWSE:6658) 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. The formula for this calculation on SynPower is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = NT$20m ÷ (NT$2.6b - NT$843m) (Based on the trailing twelve months to September 2024).
Therefore, SynPower has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.3%.
View our latest analysis for SynPower
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating SynPower's past further, check out this free graph covering SynPower's past earnings, revenue and cash flow.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 5.8% five years ago, while the business's capital employed increased by 119%. Usually this isn't ideal, but given SynPower conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with SynPower's earnings and if they change as a result from the capital raise.
The Key Takeaway
To conclude, we've found that SynPower is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 70% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a final note, we found 5 warning signs for SynPower (2 make us uncomfortable) you should be aware of.
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. 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.