Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That’s why when we briefly looked at Universal Music Group’s (AMS:UMG) ROCE trend, we were very happy with what we saw. If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Universal Music Group is: Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities) 0.21 = €1.7b ÷ (€15b – €7.2b) (Based on the trailing twelve months to June 2024). Thus, Universal Music Group has an ROCE of 21%. In absolute terms that’s a great return and it’s even better than the Entertainment industry average of 16%. See our latest analysis for Universal Music Group ENXTAM:UMG Return on Capital Employed March 3rd 2025 In the above chart we have measured Universal Music Group’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for Universal Music Group . Universal Music Group deserves to be commended in regards to it’s returns. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 71% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. You’ll see this when looking at well operated businesses or favorable business models. On a side note, Universal Music Group’s current liabilities are still rather high at 47% of total assets. 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. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower. In summary, we’re delighted to see that Universal Music Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it’s no surprise that shareholders have earned a respectable 58% return if they held over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research. Story Continues Universal Music Group does have some risks though, and we’ve spotted 1 warning sign for Universal Music Group that you might be interested in. High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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. .
