If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Sunlands Technology Group (NYSE:STG) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Sunlands Technology Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = CN¥298m ÷ (CN¥2.1b - CN¥801m) (Based on the trailing twelve months to December 2024).
Therefore, Sunlands Technology Group has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 9.7% earned by companies in a similar industry.
See our latest analysis for Sunlands Technology Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunlands Technology Group's ROCE against it's prior returns. If you'd like to look at how Sunlands Technology Group has performed in the past in other metrics, you can view this free graph of Sunlands Technology Group's past earnings, revenue and cash flow .
What Can We Tell From Sunlands Technology Group's ROCE Trend?
Like most people, we're pleased that Sunlands Technology Group is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 23% on their capital employed. In regards to capital employed, Sunlands Technology Group is using 24% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
On a related note, the company's ratio of current liabilities to total assets has decreased to 38%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Sunlands Technology Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Key Takeaway
From what we've seen above, Sunlands Technology Group has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 65% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing to note, we've identified 3 warning signs with Sunlands Technology Group and understanding these should be part of your investment process.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.