Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Blue Moon Group Holdings (HKG:6993), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. 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)

0.086 = HK$1.1b ÷ (HK$15b - HK$1.9b) (Based on the trailing twelve months to December 2021).

Thus, Blue Moon Group Holdings has an ROCE of 8.6%. Even though it's in line with the industry average of 8.6%, it's still a low return by itself.

View our latest analysis for Blue Moon Group Holdings

Above you can see how the current ROCE for Blue Moon Group Holdings 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 Blue Moon Group Holdings.

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

In terms of Blue Moon Group Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.6% for the last four years, and the capital employed within the business has risen 653% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 13% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Blue Moon Group Holdings' ROCE

Long story short, while Blue Moon Group Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 38% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Blue Moon Group Holdings you'll probably want to know about.

While Blue Moon Group Holdings 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.