Sterling Check's (NASDAQ:STER) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at Sterling Check (NASDAQ:STER) and its trend of ROCE, we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.036 = US$46m ÷ (US$1.4b - US$133m) (Based on the trailing twelve months to June 2023).

Therefore, Sterling Check has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 12%.

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 to see what analysts are forecasting going forward, you should check out our free report for Sterling Check.

What Can We Tell From Sterling Check's ROCE Trend?

We're delighted to see that Sterling Check is reaping rewards from its investments and has now broken into profitability. The company was generating losses three years ago, but has managed to turn it around and as we saw earlier is now earning 3.6%, 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.

The Bottom Line

To bring it all together, Sterling Check has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 28% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Sterling Check, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Sterling Check 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.