Cloud Music's (HKG:9899) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Cloud Music (HKG:9899) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Cloud Music is:

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

0.088 = CN¥828m ÷ (CN¥12b - CN¥3.1b) (Based on the trailing twelve months to June 2024).

So, Cloud Music has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Entertainment industry average of 9.7%.

See our latest analysis for Cloud Music

Above you can see how the current ROCE for Cloud Music 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 Cloud Music for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Cloud Music is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 8.8% which is a sight for sore eyes. In addition to that, Cloud Music is employing 57% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line

Overall, Cloud Music gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 15% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Cloud Music looks impressive, no company is worth an infinite price. The intrinsic value infographic for 9899 helps visualize whether it is currently trading for a fair price.

While Cloud Music 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.

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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.