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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Synlait Milk (NZSE:SML), we don't think it's current trends fit the mold of a multi-bagger.
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 Synlait Milk, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0075 = NZ$8.1m ÷ (NZ$1.7b - NZ$617m) (Based on the trailing twelve months to July 2023).
So, Synlait Milk has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Food industry average of 16%.
View our latest analysis for Synlait Milk
In the above chart we have measured Synlait Milk's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Synlait Milk here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Synlait Milk doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.8% from 20% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
In summary, Synlait Milk is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 91% over the last five years. Therefore based on the analysis done in this article, we don't think Synlait Milk has the makings of a multi-bagger.
One more thing: We've identified 2 warning signs with Synlait Milk (at least 1 which is potentially serious) , and understanding them would certainly be useful.
While Synlait Milk 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.