If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Warner Music Group (NASDAQ:WMG) so let's look a bit deeper.

Understanding 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 Warner Music Group is:

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

0.18 = US$948m ÷ (US$9.1b - US$3.9b) (Based on the trailing twelve months to December 2024).

Therefore, Warner Music Group has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Entertainment industry.

View our latest analysis for Warner Music Group

Above you can see how the current ROCE for Warner Music Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Warner Music Group .

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Warner Music Group. The data shows that returns on capital have increased substantially over the last five years to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 49%. So we're very much inspired by what we're seeing at Warner Music Group thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Warner Music Group has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Warner Music Group's ROCE

In summary, it's great to see that Warner Music Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 15% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we've found 3 warning signs for Warner Music Group that we think you should be aware of.

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.

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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.