Syntec Optics Holdings (NASDAQ:OPTX) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Syntec Optics Holdings (NASDAQ:OPTX) so let's look a bit deeper.

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 Syntec Optics Holdings is:

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

0.039 = US$500k ÷ (US$23m - US$11m) (Based on the trailing twelve months to June 2023).

Therefore, Syntec Optics Holdings has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

View our latest analysis for Syntec Optics Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Syntec Optics Holdings' ROCE against it's prior returns. If you're interested in investigating Syntec Optics Holdings' past further, check out this free graph covering Syntec Optics Holdings' past earnings, revenue and cash flow.

So How Is Syntec Optics Holdings' ROCE Trending?

While the ROCE is still rather low for Syntec Optics Holdings, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last one year have risen by 46%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Syntec Optics Holdings appears to been achieving more with less, since the business is using 25% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, Syntec Optics Holdings' current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

From what we've seen above, Syntec Optics Holdings has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 45% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with Syntec Optics Holdings (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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.