The Return Trends At Antero Midstream (NYSE:AM) Look Promising

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Antero Midstream's (NYSE:AM) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Antero Midstream is:

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

0.11 = US$618m ÷ (US$5.7b - US$96m) (Based on the trailing twelve months to December 2023).

So, Antero Midstream has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Oil and Gas industry average it falls behind.

See our latest analysis for Antero Midstream

Above you can see how the current ROCE for Antero Midstream compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Antero Midstream for free.

So How Is Antero Midstream's ROCE Trending?

The fact that Antero Midstream is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 11% on its capital. In addition to that, Antero Midstream is employing 18,179% more capital than previously which is expected of a company that's trying to break into profitability. 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 1.7%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Antero Midstream has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Antero Midstream's ROCE

Long story short, we're delighted to see that Antero Midstream's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 87% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Antero Midstream can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Antero Midstream (of which 1 makes us a bit uncomfortable!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.