What Can The Trends At Tencent Music Entertainment Group (NYSE:TME) Tell Us About Their Returns?

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So on that note, Tencent Music Entertainment Group (NYSE:TME) 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. To calculate this metric for Tencent Music Entertainment Group, this is the formula:

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

0.089 = CN¥4.0b ÷ (CN¥52b - CN¥8.0b) (Based on the trailing twelve months to March 2020).

Thus, Tencent Music Entertainment Group has an ROCE of 8.9%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 13%.

See 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, you can check out the forecasts from the analysts covering Tencent Music Entertainment Group here for free.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last three years, returns on capital employed have risen substantially to 8.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 99% 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.

The Bottom Line 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. Considering the stock has delivered 6.9% to its stockholders over the last year, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 2 warning signs for Tencent Music Entertainment Group you'll probably want to know about.

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.

This article by Simply Wall St is general in nature. 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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