If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Tencent Music Entertainment Group (NYSE:TME) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Tencent Music Entertainment Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = CN¥4.2b ÷ (CN¥68b - CN¥9.5b) (Based on the trailing twelve months to March 2021).
Thus, Tencent Music Entertainment Group has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 12%.NYSE:TME Return on Capital Employed June 15th 2021
Above you can see how the current ROCE for Tencent Music Entertainment Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last four years to 7.1%. The amount of capital employed has increased too, by 162%. So we're very much inspired by what we're seeing at Tencent Music Entertainment Group thanks to its ability to profitably reinvest capital.
The Bottom Line On Tencent Music Entertainment Group's ROCE
In summary, it's great to see that Tencent Music Entertainment Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 27% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Tencent Music Entertainment Group does have some risks though, and we've spotted 1 warning sign for Tencent Music Entertainment Group that you might be interested in.
While Tencent Music Entertainment 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.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
In This StoryTME
- Did You Participate In Any Of United Parcel Service's (NYSE:UPS) Fantastic 126% Return ?
- Is There Now An Opportunity In Ford Motor Company (NYSE:F)?
- Don't Ignore The Fact That This Insider Just Sold Some Shares In The Goldman Sachs Group, Inc. (NYSE:GS)
- Nio Motors (NYSE: NIO) Has Chinese Government Support: But Do The Risks Outweigh The Benefits?