If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we’re seeing at Magnolia Oil & Gas’ (NYSE:MGY) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Magnolia Oil & Gas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.43 = US$965m ÷ (US$2.6b – US$311m) (Based on the trailing twelve months to March 2023).
So, Magnolia Oil & Gas has an ROCE of 43%. In absolute terms that’s a great return and it’s even better than the Oil and Gas industry average of 23%.
The Trend Of ROCE
The trends we’ve noticed at Magnolia Oil & Gas are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 43%. 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 248%. So we’re very much inspired by what we’re seeing at Magnolia Oil & Gas thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 12% of its operations, which isn’t ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From Magnolia Oil & Gas’ ROCE
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 Magnolia Oil & Gas has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
source:https://simplywall.st/