Yahoo Finance Returns On Capital Are Showing Encouraging Signs At Tencent Music Entertainment Group (NYSE:TME)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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, Tencent Music Entertainment Group (NYSE:TME) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)
0.079 = CN¥5.0b ÷ (CN¥76b - CN¥12b) (Based on the trailing twelve months to December 2023).
Thus, Tencent Music Entertainment Group has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 11%.
Check out 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 analyst report for Tencent Music Entertainment Group .
So How Is Tencent Music Entertainment Group's ROCE Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 66% 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.
What We Can Learn From Tencent Music Entertainment Group's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Tencent Music Entertainment Group has. Astute investors may have an opportunity here because the stock has declined 34% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for TME that compares the share price and estimated value.
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.
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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.
