If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at Tencent Music Entertainment Group (NYSE:TME) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Tencent Music Entertainment Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = CN¥5.5b ÷ (CN¥79b - CN¥12b) (Based on the trailing twelve months to March 2024).
So, Tencent Music Entertainment Group has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Entertainment industry average of 8.8%.
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 analyst report for Tencent Music Entertainment Group .
What The Trend Of ROCE Can Tell Us
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 five years to 8.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 67% more capital is being employed now too. So we're very much inspired by what we're seeing at Tencent Music Entertainment Group thanks to its ability to profitably reinvest capital.
Our Take On Tencent Music Entertainment Group's ROCE
To sum it up, Tencent Music Entertainment Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 12% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
While Tencent Music Entertainment Group looks impressive, no company is worth an infinite price. The intrinsic value infographic for TME helps visualize whether it is currently trading for a fair price.
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.
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.