The Bellamy's share price has fallen more than 45% in 12 months

The Bellamy's Australia Ltd (ASX: BAL) share price last closed at $8.42 per share, a discount of more than 45% when compared to the 52-week high. Is it a buy?

a woman

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I have recently spent time reviewing the annual reports and announcements from Bellamy's Australia Ltd (ASX: BAL) to assess the merit of buying BAL shares. The Bellamy's Australia share price closed at $8.42 per share yesterday, which is a discount of more than 45% when compared to its 52-week high.

In my assessment of Bellamy's Australia, I focused on the company's past financial performance and the expected likelihood of its success into the future. These two factors, as well as my conclusions, have been outlined below.

The financial performance of Bellamy's Australia

Return on equity (ROE) is a strong metric for assessing a company's overall performance. Bellamy's Australia has performed well, according to this measure, with an average of more than 25% ROE over the past 5 years. However, this rate has declined each of the past 2 years and, based on the most recent half-yearly results, could decline again this year.

Growth in revenue and earnings can be key drivers for growth in share price. Over the past 5 years, revenue has continued to rise for Bellamy's Australia. Over this same time period, earning per share have also grown significantly, albeit with a loss in 2017. However, Bellamy's half-yearly results indicate that earnings and revenue for 2019 could be below the level achieved in 2018.

Cash flow and debt are also items worth considering before making an investment. Bellamy's Australia has zero debt, which is a low-risk position. The company has also generated a positive cash flow from operations over the past 5-year period, which is a good sign.

The future prospects of Bellamy's Australia

Determining what the future holds for a company is not straightforward. However, the Bellamy's Australia half-yearly results presentation outlines some of the company's strategies for success. These include recently undergoing product upgrades and a significant rebrand. Bellamy's is also trying to push further into the large Chinese market, although there have been delays in getting the required product registrations.

The Bellamy's Australia half-yearly results presentation points out that 1H19 results have been impacted by competitors increasing supply. It also states that Bellamy's Australia is the number one organic formula brand in Australia, but the number two brand worldwide. These points make me question whether Bellamy's is operating with any distinct competitive advantage in its markets.

Foolish takeaway

Despite the significant fall in share price, I don't believe BAL shares are being sold at any significant discount to true value. This company has the potential to be very successful into the future, however, the lack of an easily identifiable competitive advantage leads me to prefer other investment opportunities at this time.

Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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