Sterling Tools (NSE:STERTOOLS) Is Experiencing Growth In Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Sterling Tools (NSE:STERTOOLS) looks quite promising in regards to its trends of return on capital.

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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. Analysts use this formula to calculate it for Sterling Tools:

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

0.11 = ₹633m ÷ (₹7.9b - ₹2.0b) (Based on the trailing twelve months to June 2025).

So, Sterling Tools has an ROCE of 11%. In isolation, that's a pretty standard return but against the Auto Components industry average of 14%, it's not as good.

See our latest analysis for Sterling Tools

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sterling Tools' ROCE against it's prior returns. If you're interested in investigating Sterling Tools' past further, check out this free graph covering Sterling Tools' past earnings, revenue and cash flow.

What Does the ROCE Trend For Sterling Tools Tell Us?

The trends we've noticed at Sterling Tools are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 51%. So we're very much inspired by what we're seeing at Sterling Tools thanks to its ability to profitably reinvest capital.

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. Effectively this means that suppliers or short-term creditors are now funding 26% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Sterling Tools' ROCE

To sum it up, Sterling Tools has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Sterling Tools can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Sterling Tools and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.