Returns Are Gaining Momentum At Tencent Music Entertainment Group (NYSE:TME)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Tencent Music Entertainment Group's (NYSE:TME) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.067 = CN¥3.8b ÷ (CN¥66b - CN¥10.0b) (Based on the trailing twelve months to September 2021).

Thus, Tencent Music Entertainment Group has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 11%.

Check out our latest analysis for Tencent Music Entertainment Group

In the above chart we have measured Tencent Music Entertainment Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tencent Music Entertainment Group here for free.

What Does the ROCE Trend For Tencent Music Entertainment Group Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last four years to 6.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 125% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Tencent Music Entertainment Group's ROCE

All in all, it's terrific to see that Tencent Music Entertainment Group is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 46% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

While Tencent Music Entertainment Group looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether TME is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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