Warner Music Group (NASDAQ:WMG) may have what it takes to be a multi-bagger

What are the early trends to look for to identify a stock that could multiply in value over the long term? First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. Speaking of which, we’ve noticed big changes in Warner Music Group (NASDAQ: WMG) returns to capital, so let’s look.

Return on capital employed (ROCE): what is it?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business 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)

0.14 = $652 million ÷ ($8.0 billion – $3.4 billion) (Based on the last twelve months to December 2021).

Therefore, Warner Music Group has a ROCE of 14%. In absolute terms, that’s a decent return, but compared to the entertainment industry average of 8.3%, it’s much better.

See our latest analysis for Warner Music Group


Above, you can see how Warner Music Group’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you wish, you can view forecasts from analysts covering Warner Music Group here for free.

The ROCE trend

Warner Music Group shows positive trends. Data shows that capital returns have increased significantly over the past five years to 14%. Basically, the business earns more per dollar of invested capital and on top of that, 37% more capital is also utilized now. This may indicate that there are many opportunities to invest capital internally and at ever-increasing rates, a common combination among multi-baggers.

On a separate but related note, it’s important to know that Warner Music Group has a current liabilities to total assets ratio of 42%, which we consider quite high. This may entail certain risks, since the company is essentially dependent on its suppliers or other types of short-term creditors. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.

The essential

In summary, it’s great to see that Warner Music Group can rack up returns by constantly reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought after multi-baggers. Astute investors may have an opportunity here as the stock is down 13% over the past year. It therefore seems warranted to do further research on this company and determine whether or not these trends will continue.

Finally we found 4 warning signs for Warner Music Group (1 is concerning) you should be aware.

Although Warner Music Group isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.