The Return Trends At Sunlands Technology Group (NYSE:STG) Look Promising

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Sunlands Technology Group (NYSE:STG) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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)

0.17 = CN¥114m ÷ (CN¥2.6b - CN¥1.9b) (Based on the trailing twelve months to December 2021).

Therefore, Sunlands Technology Group has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Consumer Services industry.

View 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're interested in investigating Sunlands Technology Group's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Sunlands Technology Group is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 17% on its capital. And unsurprisingly, like most companies trying to break into the black, Sunlands Technology Group is utilizing 281% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 74%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Sunlands Technology Group's ROCE

In summary, it's great to see that Sunlands Technology Group has managed to break into profitability and is continuing to reinvest in its business. However the stock is down a substantial 90% in the last three years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Sunlands Technology Group does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are potentially serious...

While Sunlands Technology Group 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.