If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Sterling Check (NASDAQ:STER) looks quite promising in regards to its trends of return on capital.

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. 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)

0.013 = US$17m ÷ (US$1.4b - US$130m) (Based on the trailing twelve months to June 2022).

So, Sterling Check has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 13%.

See our latest analysis for Sterling Check

Above you can see how the current ROCE for Sterling Check compares to its prior returns on capital, but there's only so much you can tell from the past. 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?

Sterling Check has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 1.3% on its capital, because two years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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 On Sterling Check's ROCE

As discussed above, Sterling Check appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 25% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

While Sterling Check looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether STER is currently trading for a fair price.

While Sterling Check may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.