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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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, the ROCE of Sunlands Technology Group (NYSE:STG) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on Sunlands Technology Group is:

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

0.33 = CN¥423m ÷ (CN¥2.2b - CN¥897m) (Based on the trailing twelve months to June 2024).

Thus, Sunlands Technology Group has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 8.0%.

See 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'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 Does the ROCE Trend For Sunlands Technology Group Tell Us?

It's great to see that Sunlands Technology Group has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 33% which is no doubt a relief for some early shareholders. In regards to capital employed, Sunlands Technology Group is using 26% 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. Sunlands Technology Group could be selling under-performing assets since the ROCE is improving.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 41%, 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.

The Bottom Line On Sunlands Technology Group's ROCE

In the end, Sunlands Technology Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. However the stock is down a substantial 76% in the last five 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.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.