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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, SYZYGY (ETR:SYZ) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for SYZYGY, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = €5.7m ÷ (€86m - €26m) (Based on the trailing twelve months to December 2024).
Therefore, SYZYGY has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.
See our latest analysis for SYZYGY
In the above chart we have measured SYZYGY'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 SYZYGY for free.
The Trend Of ROCE
You'd find it hard not to be impressed with the ROCE trend at SYZYGY. We found that the returns on capital employed over the last five years have risen by 136%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 37% less than it was five years ago, which can be indicative of a business that's improving its efficiency. SYZYGY may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
What We Can Learn From SYZYGY's ROCE
In the end, SYZYGY has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 45% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
SYZYGY does have some risks though, and we've spotted 2 warning signs for SYZYGY that you might be interested in.
While SYZYGY 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.