Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 on that note, Whirlpool China (SHSE:600983) looks quite promising in regards to its trends of return on capital.

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 Whirlpool China:

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

0.011 = CN¥33m ÷ (CN¥5.7b - CN¥2.6b) (Based on the trailing twelve months to June 2023).

Thus, Whirlpool China has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.0%.

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.

What Can We Tell From Whirlpool China's ROCE Trend?

Like most people, we're pleased that Whirlpool China is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.1% on their capital employed. In regards to capital employed, Whirlpool China is using 26% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a separate but related note, it's important to know that Whirlpool China has a current liabilities to total assets ratio of 45%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, it's great to see that Whirlpool China has been able to turn things around and earn higher returns on lower amounts of capital. And with a respectable 40% 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. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about Whirlpool China, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

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.

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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.