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How Do Synectics plc’s (LON:SNX) Returns Compare To Its Industry?

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Simply Wall St
·4 min read
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Today we are going to look at Synectics plc (LON:SNX) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Synectics:

0.066 = UK£2.7m ÷ (UK£66m - UK£25m) (Based on the trailing twelve months to May 2019.)

Therefore, Synectics has an ROCE of 6.6%.

See our latest analysis for Synectics

Is Synectics's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Synectics's ROCE is meaningfully below the Electronic industry average of 9.8%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Synectics stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

We can see that, Synectics currently has an ROCE of 6.6% compared to its ROCE 3 years ago, which was 4.9%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Synectics's ROCE compares to its industry. Click to see more on past growth.

AIM:SNX Past Revenue and Net Income, February 25th 2020
AIM:SNX Past Revenue and Net Income, February 25th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Synectics? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Synectics's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Synectics has total assets of UK£66m and current liabilities of UK£25m. As a result, its current liabilities are equal to approximately 38% of its total assets. Synectics has a medium level of current liabilities, which would boost its ROCE somewhat.

Our Take On Synectics's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Synectics better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.