What trends should we look for if we are to identify stocks that can multiply in value over the long term? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. So when we looked Tencent Musical Entertainment Group (NYSE: TME) and its trend of ROCE, we really liked what we saw.
What is Return on Employee Capital (ROCE)?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Tencent Music Entertainment Group, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.067 = CN Â¥ 3.8b Ã· (CN Â¥ 66b – CN Â¥ 10.0b) (Based on the last twelve months up to September 2021).
Thereby, Tencent Music Entertainment Group has 6.7% ROCE. In absolute terms, that’s a low return, and it’s also below the entertainment industry average by 10%.
NYSE: TME Return on Capital Employed November 22, 2021
In the graph above, we measured Tencent Music Entertainment Group’s past ROCE against its past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Tencent Music Entertainment Group.
So what’s the ROCE trend of Tencent Music Entertainment Group?
We are happy to see that the ROCE is heading in the right direction, although it is still weak at the moment. Figures show that over the past four years, returns on capital employed have increased significantly to 6.7%. The company actually makes more money per dollar of capital used, and it should be noted that the amount of capital has also increased by 125%. So we’re very inspired by what we’re seeing at Tencent Music Entertainment Group with its ability to reinvest capital in a profitable manner.
What we can learn from Tencent Music Entertainment Group’s ROCE
In summary, it is great to see that Tencent Music Entertainment Group can increase returns by systematically reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought after multi-baggers. Given that the stock has fallen 54% in the past year, it could be a good investment if valuation and other metrics are attractive as well. It therefore seems warranted to further research this company and determine whether these trends will continue or not.
If you want to know the risks facing Tencent Music Entertainment Group, we have found out 1 warning sign that you need to be aware of.
Although Tencent Music Entertainment Group does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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