Why The 28% Return On Capital At Sunlands Technology Group (NYSE:STG) Should Have Your Attention

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Sunlands Technology Group (NYSE:STG) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Sunlands Technology Group:

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

0.28 = CN¥366m ÷ (CN¥2.2b - CN¥828m) (Based on the trailing twelve months to September 2024).

So, Sunlands Technology Group has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 9.2%.

See our latest analysis for Sunlands Technology Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Sunlands Technology Group has performed in the past in other metrics, you can view this free graph of Sunlands Technology Group's past earnings, revenue and cash flow.

What Can We Tell From Sunlands Technology Group's ROCE Trend?

We're delighted to see that Sunlands Technology Group is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 28% on their capital employed. In regards to capital employed, Sunlands Technology Group is using 24% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a related note, the company's ratio of current liabilities to total assets has decreased to 38%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

In a nutshell, we're pleased to see that Sunlands Technology Group has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 77% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing to note, we've identified 2 warning signs with Sunlands Technology Group and understanding these should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.