Stock Analysis

Capital Allocation Trends At Blue Moon Group Holdings (HKG:6993) Aren't Ideal

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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Blue Moon Group Holdings (HKG:6993), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Blue Moon Group Holdings, this is the formula:

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

0.094 = HK$1.1b ÷ (HK$13b - HK$1.8b) (Based on the trailing twelve months to June 2022).

Therefore, Blue Moon Group Holdings has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Household Products industry average of 5.2%.

See our latest analysis for Blue Moon Group Holdings

SEHK:6993 Return on Capital Employed January 30th 2023

In the above chart we have measured Blue Moon Group Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Blue Moon Group Holdings here for free.

What Can We Tell From Blue Moon Group Holdings' ROCE Trend?

On the surface, the trend of ROCE at Blue Moon Group Holdings doesn't inspire confidence. Over the last four years, returns on capital have decreased to 9.4% from 23% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Blue Moon Group Holdings has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Blue Moon Group Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Blue Moon Group Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 24% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Blue Moon Group Holdings does have some risks though, and we've spotted 1 warning sign for Blue Moon Group Holdings that you might be interested in.

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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