Returns On Capital At Hello Group (NASDAQ:MOMO) Paint A Concerning Picture
If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Hello Group (NASDAQ:MOMO), we don't think it's current trends fit the mold of a multi-bagger.
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 Hello Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥1.5b ÷ (CN¥16b - CN¥2.1b) (Based on the trailing twelve months to June 2022).
Therefore, Hello Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Interactive Media and Services industry average of 5.2% it's much better.
See our latest analysis for Hello Group
Above you can see how the current ROCE for Hello Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hello Group.
The Trend Of ROCE
When we looked at the ROCE trend at Hello Group, we didn't gain much confidence. Around five years ago the returns on capital were 36%, but since then they've fallen to 11%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Hello Group's ROCE
In summary, Hello Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 74% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Hello Group has the makings of a multi-bagger.
If you'd like to know about the risks facing Hello Group, we've discovered 2 warning signs that you should be aware of.
While Hello Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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