Sypris Solutions (NASDAQ:SYPR) Is Looking To Continue Growing Its Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Sypris Solutions (NASDAQ:SYPR) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sypris Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = US$1.1m ÷ (US$130m - US$85m) (Based on the trailing twelve months to October 2023).
Therefore, Sypris Solutions has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 12%.
View our latest analysis for Sypris Solutions
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Sypris Solutions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Sypris Solutions' ROCE Trending?
The fact that Sypris Solutions is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 2.5% on its capital. Not only that, but the company is utilizing 38% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 65% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line On Sypris Solutions' ROCE
To the delight of most shareholders, Sypris Solutions has now broken into profitability. Since the stock has returned a staggering 104% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Sypris Solutions does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
While Sypris Solutions 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.
