Sterling Check (NASDAQ:STER) 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? 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. With that in mind, we've noticed some promising trends at Sterling Check (NASDAQ:STER) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Sterling Check, this is the formula:

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

0.041 = US$53m ÷ (US$1.4b - US$127m) (Based on the trailing twelve months to September 2022).

Thus, Sterling Check has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 13%.

View our latest analysis for Sterling Check

In the above chart we have measured Sterling Check's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sterling Check here for free.

What Does the ROCE Trend For Sterling Check Tell Us?

Sterling Check has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses two years ago, but has managed to turn it around and as we saw earlier is now earning 4.1%, which is always encouraging. While returns have increased, the amount of capital employed by Sterling Check has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

Our Take On Sterling Check's ROCE

To bring it all together, Sterling Check has done well to increase the returns it's generating from its capital employed. Given the stock has declined 23% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 3 warning signs we've spotted with Sterling Check (including 1 which is a bit concerning) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.