Public Companies

We Like These Underlying Return On Capital Trends At Zepp Health (NYSE:ZEPP)

If you're looking for a multi-bagger, there's a few things to 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. 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 when we looked at Zepp Health (NYSE:ZEPP) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Zepp Health, this is the formula:

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

0.037 = CN¥148m ÷ (CN¥6.1b - CN¥2.1b) (Based on the trailing twelve months to September 2021).

So, Zepp Health has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 9.9%.

roce
NYSE:ZEPP Return on Capital Employed January 18th 2022

Above you can see how the current ROCE for Zepp Health 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 Zepp Health.

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 1,153% more capital is being employed now too. So we're very much inspired by what we're seeing at Zepp Health thanks to its ability to profitably reinvest capital.

One more thing to note, Zepp Health has decreased current liabilities to 35% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Zepp Health's ROCE

To sum it up, Zepp Health has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 51% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 3 warning signs for Zepp Health that we think you should be aware of.

While Zepp Health 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.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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