Advertisement
UK markets close in 7 hours 2 minutes
  • FTSE 100

    8,350.33
    -20.00 (-0.24%)
     
  • FTSE 250

    20,716.97
    +6.90 (+0.03%)
     
  • AIM

    803.56
    -0.31 (-0.04%)
     
  • GBP/EUR

    1.1747
    -0.0000 (-0.00%)
     
  • GBP/USD

    1.2737
    +0.0017 (+0.14%)
     
  • Bitcoin GBP

    54,683.78
    -164.06 (-0.30%)
     
  • CMC Crypto 200

    1,520.42
    +17.75 (+1.18%)
     
  • S&P 500

    5,307.01
    -14.40 (-0.27%)
     
  • DOW

    39,671.04
    -201.95 (-0.51%)
     
  • CRUDE OIL

    77.61
    +0.04 (+0.05%)
     
  • GOLD FUTURES

    2,357.70
    -35.20 (-1.47%)
     
  • NIKKEI 225

    39,103.22
    +486.12 (+1.26%)
     
  • HANG SENG

    18,868.71
    -326.89 (-1.70%)
     
  • DAX

    18,715.89
    +35.69 (+0.19%)
     
  • CAC 40

    8,111.74
    +19.63 (+0.24%)
     

Hello Group (NASDAQ:MOMO) Has More To Do To Multiply In Value Going Forward

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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.

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. The formula for this calculation on Hello Group is:

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

0.16 = CN¥2.3b ÷ (CN¥16b - CN¥2.1b) (Based on the trailing twelve months to December 2023).

ADVERTISEMENT

Thus, Hello Group has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Interactive Media and Services industry average of 7.1% it's much better.

Check out our latest analysis for Hello Group

roce
roce

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, you can check out the forecasts from the analysts covering Hello Group for free.

What Can We Tell From Hello Group's ROCE Trend?

Things have been pretty stable at Hello Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Hello Group to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Hello Group has been paying out a decent 39% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

Our Take On Hello Group's ROCE

In summary, Hello Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 76% over the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Hello Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.