Returns On Capital Are Showing Encouraging Signs At Zepp Health (NYSE:ZEPP)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zepp Health is:

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

0.032 = CN¥104m ÷ (CN¥5.6b - CN¥2.4b) (Based on the trailing twelve months to March 2021).

Therefore, Zepp Health has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

View our latest analysis for Zepp Health

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, you can check out the forecasts from the analysts covering Zepp Health here for free.

What Does the ROCE Trend For Zepp Health Tell Us?

The fact that Zepp Health is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 3.2% which is a sight for sore eyes. In addition to that, Zepp Health is employing 1,094% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 42%, 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. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line

Overall, Zepp Health gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 14% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 3 warning signs for Zepp Health you'll probably want to know about.

While Zepp Health isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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