STG's (TSE:5858) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating STG (TSE:5858), we don't think it's current trends fit the mold of a multi-bagger.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for STG:

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

0.12 = JP¥538m ÷ (JP¥7.3b - JP¥2.7b) (Based on the trailing twelve months to June 2025).

Therefore, STG has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Machinery industry.

View our latest analysis for STG

Historical performance is a great place to start when researching a stock so above you can see the gauge for STG's ROCE against it's prior returns. If you'd like to look at how STG has performed in the past in other metrics, you can view this free graph of STG's past earnings, revenue and cash flow.

The Trend Of ROCE

We weren't thrilled with the trend because STG's ROCE has reduced by 24% over the last five years, while the business employed 296% more capital. Usually this isn't ideal, but given STG conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. STG probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that STG is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 118% return over the last year, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 3 warning signs with STG (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While STG 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.

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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.