Some Investors May Be Worried About Tencent Music Entertainment Group's (NYSE:TME) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Tencent Music Entertainment Group (NYSE:TME) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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)

0.074 = CN¥4.6b ÷ (CN¥73b - CN¥11b) (Based on the trailing twelve months to September 2023).

So, Tencent Music Entertainment Group has an ROCE of 7.4%. On its own, that's a low figure but it's around the 8.4% average generated by the Entertainment industry.

View our latest analysis for Tencent Music Entertainment Group

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'd like to see what analysts are forecasting going forward, you should check out our free report for Tencent Music Entertainment Group.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Tencent Music Entertainment Group doesn't inspire confidence. To be more specific, ROCE has fallen from 9.8% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Tencent Music Entertainment Group's ROCE

To conclude, we've found that Tencent Music Entertainment Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 41% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you're still interested in Tencent Music Entertainment Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.