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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think STV Group (LON:STVG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for STV Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = UK£9.6m ÷ (UK£154m - UK£44m) (Based on the trailing twelve months to December 2023).
So, STV Group has an ROCE of 8.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.
Check out our latest analysis for STV Group
In the above chart we have measured STV Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for STV Group .
What Does the ROCE Trend For STV Group Tell Us?
When we looked at the ROCE trend at STV Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 23% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for STV Group. And there could be an opportunity here if other metrics look good too, because the stock has declined 12% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
STV Group does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those are a bit unpleasant...
While STV Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.