The Return Trends At Sypris Solutions (NASDAQ:SYPR) Look Promising
There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Sypris Solutions (NASDAQ:SYPR) and its trend of ROCE, we really liked what we saw.
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 Sypris Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0019 = US$94k ÷ (US$92m - US$42m) (Based on the trailing twelve months to October 2022).
Thus, Sypris Solutions has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 14%.
See our latest analysis for Sypris Solutions
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sypris Solutions' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sypris Solutions, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Sypris Solutions is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 0.2% which is a sight for sore eyes. In addition to that, Sypris Solutions is employing 36% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a separate but related note, it's important to know that Sypris Solutions has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Sypris Solutions' ROCE
To the delight of most shareholders, Sypris Solutions has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 32% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Sypris Solutions does have some risks though, and we've spotted 2 warning signs for Sypris Solutions that you might be interested in.
While Sypris Solutions 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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