Blue Moon Group Holdings Limited (HKG:6993) Stock's On A Decline: Are Poor Fundamentals The Cause?

With its stock down 39% over the past three months, it is easy to disregard Blue Moon Group Holdings (HKG:6993). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Blue Moon Group Holdings' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Blue Moon Group Holdings

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Blue Moon Group Holdings is:

6.0% = HK$593m ÷ HK$9.8b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.06.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Blue Moon Group Holdings' Earnings Growth And 6.0% ROE

On the face of it, Blue Moon Group Holdings' ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.0%, we may spare it some thought. But Blue Moon Group Holdings saw a five year net income decline of 9.2% over the past five years. Remember, the company's ROE is a bit low to begin with. Hence, this goes some way in explaining the shrinking earnings.

However, when we compared Blue Moon Group Holdings' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.8% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Blue Moon Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Blue Moon Group Holdings Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 82% (implying that 18% of the profits are retained), most of Blue Moon Group Holdings' profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.

In addition, Blue Moon Group Holdings only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 91%. Still, forecasts suggest that Blue Moon Group Holdings' future ROE will rise to 9.2% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we would be extremely cautious before making any decision on Blue Moon Group Holdings. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.