Why The 22% Return On Capital At Magnolia Oil & Gas (NYSE:MGY) Should Have Your Attention

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Magnolia Oil & Gas' (NYSE:MGY) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Magnolia Oil & Gas:

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

0.22 = US$532m ÷ (US$2.8b - US$350m) (Based on the trailing twelve months to March 2024).

Thus, Magnolia Oil & Gas has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 12%.

View 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'd like, you can check out the forecasts from the analysts covering Magnolia Oil & Gas for free.

What Does the ROCE Trend For Magnolia Oil & Gas Tell Us?

We're pretty happy with how the ROCE has been trending at Magnolia Oil & Gas. We found that the returns on capital employed over the last five years have risen by 151%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In Conclusion...

From what we've seen above, Magnolia Oil & Gas has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 157% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Magnolia Oil & Gas does have some risks though, and we've spotted 2 warning signs for Magnolia Oil & Gas that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com