Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of STV Group (LON:STVG) looks attractive right now, so lets see what the trend of returns can tell us.

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. Analysts use this formula to calculate it for STV Group:

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

0.27 = UK£23m ÷ (UK£118m - UK£33m) (Based on the trailing twelve months to June 2022).

Therefore, STV Group has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

View our latest analysis for STV Group  roce

Above you can see how the current ROCE for STV Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering STV Group here  for free.

How Are Returns Trending?

It's hard not to be impressed by STV Group's returns on capital. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 20% more capital into its operations. Now considering ROCE is an attractive 27%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 28% of total assets, this reported ROCE would probably be less than27% because total capital employed would be higher.The 27% ROCE could be even lower if current liabilities weren't 28% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.



The Key Takeaway

In summary, we're delighted to see that STV Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Yet over the last five years the stock has declined 11%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a separate note, we've found  2 warning signs for STV Group  you'll probably want to know about.

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

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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