Return Trends At Haier Smart Home (SHSE:600690) Aren’t Appealing

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. That’s why when we briefly looked at Haier Smart Home’s (SHSE:600690) ROCE trend, we were pretty happy with what we saw.

Understanding 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 Haier Smart Home:

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

0.13 = CN¥18b ÷ (CN¥258b – CN¥120b) (Based on the trailing twelve months to March 2024).

Therefore, Haier Smart Home has an ROCE of 13%. In absolute terms, that’s a satisfactory return, but compared to the Consumer Durables industry average of 8.4% it’s much better.

View our latest analysis for Haier Smart Home

In the above chart we have measured Haier Smart Home’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 analyst report for Haier Smart Home .

How Are Returns Trending?

While the returns on capital are good, they haven’t moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 53% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Haier Smart Home has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, Haier Smart Home has a high ratio of current liabilities to total assets of 46%. 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. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Haier Smart Home’s ROCE

In the end, Haier Smart Home has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.

If you’re still interested in Haier Smart Home it’s worth checking out our FREE intrinsic value approximation for 600690 to see if it’s trading at an attractive price in other respects.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com