If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Synaptics (NASDAQ:SYNA) 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 Synaptics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0066 = US$15m ÷ (US$2.5b - US$246m) (Based on the trailing twelve months to September 2023).
Therefore, Synaptics has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.
See our latest analysis for Synaptics
In the above chart we have measured Synaptics' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 0.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 92%. So we're very much inspired by what we're seeing at Synaptics thanks to its ability to profitably reinvest capital.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 9.6%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Synaptics has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line
All in all, it's terrific to see that Synaptics is reaping the rewards from prior investments and is growing its capital base. And a remarkable 185% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Synaptics does have some risks though, and we've spotted 1 warning sign for Synaptics that you might be interested in.
While Synaptics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.