Shareholders Would Enjoy A Repeat Of Magnolia Oil & Gas' (NYSE:MGY) Recent Growth In Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Magnolia Oil & Gas (NYSE:MGY) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on Magnolia Oil & Gas is:

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

0.25 = US$594m ÷ (US$2.7b - US$304m) (Based on the trailing twelve months to September 2023).

Thus, Magnolia Oil & Gas has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 17%.

Check out our latest analysis for Magnolia Oil & Gas

Above you can see how the current ROCE for Magnolia Oil & Gas compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Magnolia Oil & Gas' ROCE Trend?

We're pretty happy with how the ROCE has been trending at Magnolia Oil & Gas. The figures show that over the last five years, returns on capital have grown by 238%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Magnolia Oil & Gas appears to been achieving more with less, since the business is using 25% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Key Takeaway

In a nutshell, we're pleased to see that Magnolia Oil & Gas has been able to generate higher returns from less capital. And with a respectable 84% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Magnolia Oil & Gas can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Magnolia Oil & Gas, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.