Yahoo Finance Returns Are Gaining Momentum At Zepp Health (NYSE:ZEPP)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Zepp Health's (NYSE:ZEPP) returns on capital, so let's have a look.
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 Zepp Health:
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).
Therefore, 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%.
See our latest analysis for Zepp Health
In the above chart we have measured Zepp Health'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 report on analyst forecasts for the company.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 3.7%. 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 1,153%. So we're very much inspired by what we're seeing at Zepp Health thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 35%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Zepp Health has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
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. Astute investors may have an opportunity here because the stock has declined 17% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.
Zepp Health does have some risks though, and we've spotted 3 warning signs for Zepp Health that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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