To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at NetEase Cloud Music (HKG:9899) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 NetEase Cloud Music:

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

0.088 = CN¥828m ÷ (CN¥12b - CN¥3.1b) (Based on the trailing twelve months to June 2024).

Therefore, NetEase Cloud Music has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Entertainment industry average of 11%.

View our latest analysis for NetEase Cloud Music

Above you can see how the current ROCE for NetEase Cloud Music 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 NetEase Cloud Music .

What Can We Tell From NetEase Cloud Music's ROCE Trend?

The fact that NetEase Cloud Music is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 8.8% on its capital. And unsurprisingly, like most companies trying to break into the black, NetEase Cloud Music is utilizing 57% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line On NetEase Cloud Music's ROCE

Overall, NetEase Cloud Music gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 2.6% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

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 9899 that compares the share price and estimated value.

While NetEase Cloud Music 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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