To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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 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. Analysts use this formula to calculate it for Zepp Health:

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

0.056 = CN¥174m ÷ (CN¥5.9b - CN¥2.8b) (Based on the trailing twelve months to December 2020).

So, Zepp Health has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Zepp Health's ROCE Trending?

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 5.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Zepp Health is utilizing 1,137% more capital than it was five years ago. 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 side note, Zepp Health's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To the delight of most shareholders, Zepp Health has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 11% to shareholders. So with that in mind, we think the stock deserves further research.

Like most companies, Zepp Health does come with some risks, and we've found 3 warning signs that you should be aware of.

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.

This article by Simply Wall St is general in nature. 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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