Returns On Capital Are Showing Encouraging Signs At Whirlpool China (SHSE:600983)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Whirlpool China (SHSE:600983) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Whirlpool China, this is the formula:

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

0.01 = CN¥27m ÷ (CN¥4.9b - CN¥2.3b) (Based on the trailing twelve months to June 2024).

Thus, Whirlpool China has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.8%.

View our latest analysis for Whirlpool China

Historical performance is a great place to start when researching a stock so above you can see the gauge for Whirlpool China's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Whirlpool China.

How Are Returns Trending?

We're delighted to see that Whirlpool China is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.0% on their capital employed. Additionally, the business is utilizing 37% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Whirlpool China could be selling under-performing assets since the ROCE is improving.

On a separate but related note, it's important to know that Whirlpool China has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Whirlpool China's ROCE

In the end, Whirlpool China has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 77% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 2 warning signs we've spotted with Whirlpool China (including 1 which doesn't sit too well with us) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.