If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Analysts use this formula to calculate it for Tencent Music Entertainment Group:

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

0.099 = CN¥6.8b ÷ (CN¥85b - CN¥15b) (Based on the trailing twelve months to September 2024).

So, Tencent Music Entertainment Group has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Entertainment industry average of 8.5%.

View 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're interested, you can view the analysts predictions in our free analyst report for Tencent Music Entertainment Group .

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.9%. The amount of capital employed has increased too, by 64%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So with that in mind, we think the stock deserves further research.

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

While Tencent Music Entertainment Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.