If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we’ve noticed some promising trends at Synnex Technology International (TPE:2347) so let’s look a bit deeper.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Synnex Technology International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = NT$7.8b ÷ (NT$149b – NT$95b) (Based on the trailing twelve months to September 2020).
Therefore, Synnex Technology International has an ROCE of 15%. On its own, that’s a standard return, however it’s much better than the 11% generated by the Electronic industry.
Above you can see how the current ROCE for Synnex Technology International compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Synnex Technology International.
What The Trend Of ROCE Can Tell Us
Synnex Technology International is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 81% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
Another thing to note, Synnex Technology International has a high ratio of current liabilities to total assets of 64%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Synnex Technology International’s ROCE
As discussed above, Synnex Technology International appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 99% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you’d like to know more about Synnex Technology International, we’ve spotted 2 warning signs, and 1 of them shouldn’t be ignored.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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