If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Sterling Infrastructure (NASDAQ:STRL) we really liked what we saw.

Understanding 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. The formula for this calculation on Sterling Infrastructure is:

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

0.22 = US$259m ÷ (US$2.0b - US$839m) (Based on the trailing twelve months to September 2024).

Thus, Sterling Infrastructure has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Construction industry average of 11%.

View our latest analysis for Sterling Infrastructure

In the above chart we have measured Sterling Infrastructure'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 Infrastructure for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Sterling Infrastructure are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 284%. So we're very much inspired by what we're seeing at Sterling Infrastructure thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Sterling Infrastructure has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

All in all, it's terrific to see that Sterling Infrastructure is reaping the rewards from prior investments and is growing its capital base. And a remarkable 1,109% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Sterling Infrastructure can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Sterling Infrastructure, we've discovered 1 warning sign that you should be aware of.

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.